Australia central bank needs to see period of housing market moderation: Lowe

Irving Hamilton
August 10, 2018

This is important for the Aussie Dollar because the RBA has held its interest rate at a record low of 1.5% for exactly two years now, citing below-target inflation and a debt laden household sector that it says is ill-equipped to handle the pressures of higher borrowing costs.

'Over the past decade, most countries have experienced average annual population growth of less than 1 per cent and a number of countries have experienced stagnant or declining populations, ' Dr Lowe told the Anika Foundation today.

The low level of interest rates is continuing to support the Australian economy, RBA noted. Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual, said RBA.

Dr Lowe said the RBA needed "to keep a close eye on the housing market and housing finance" but added it was helpful the change was taking place at a time when the unemployment rate is trending lower and the economy is recording good growth. Although Australian shares are excluded from this, the overall positive lead from equity markets overnight has fed through to Asian futures markets, with Japanese and Chinese indices pointing to a higher open today. "Gross domestic product growth is expected to average a bit above 3% in 2018 and 2019".

"Three-year fixed rates for investors have increased by 10 basis points and discounted variable rates are up 40 basis points for investment loans", he said. The investments by non-mining companies is increasing, which is leading to more jobs in the beleaguered industry.

Economists suggest a mix of other factors contribute to the board's decision each month, such as data on consumer and business sentiment and business conditions across industries. The retail sales for the month of May increased by 0.4%, which was better than the expected 0.3%. The main opposition Labor party may dilute planned income tax cuts that - in an environment of stagnant wages and rates - are one of the few options to boost wages. The PPI for the second quarter rose by 0.3%, which was lower than the expected 0.3%.

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However, he also suggested the unemployment rate may need to fall further than was previously expected before wage and inflation pressures begin to pick up, telling the audience 5% is "conventional estimate of full employment in Australia, but it is possible that we could go lower than this".

The Australian economy has also faced a major challenge related to the climate. There has been a broad-based appreciation of the USA dollar over recent months.

Education has also been a key driver of immigration, with more than 500,00 overseas students studying in Australia.

The slowdown in the home market, particularly in Sydney and Melbourne, has reportedly influenced the RBA's reluctance to raise rates. They are falling because of overcapacity and the limited demand for the houses.

As China is Australia's biggest trade partner, news that Chinese markets were performing more strongly on Tuesday, as well as the day's weakness in the US Dollar (USD), left the Australian Dollar more appealing.

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