Interest Rates Expected to Stay Low Despite Housing Surge

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Wednesday, October 22nd, 2014
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Housing investment is booming, but the Reserve Bank is still not giving any indication when it intends to increase its interest rate.

Other factors like a persistently high Australian dollar, slow wages growth and a weak labour market are keeping the RBA from raising the cash rate for now.

It last changed the cash rate at its August 2013 board meeting, when it cut it to a new record low of 2.5 per cent.

The minutes of its October 2014 board meeting showed the RBA was pleased with growth in the housing market, but it is worried that investors and the purchase of existing homes is dominating that growth.

It said interest rates for loans edged lower in recent months as competition among lenders increased.

“In this context members discussed the importance of lenders maintaining strong lending standards,” the RBA said on Tuesday.”

A week before its last meeting in early October, the Reserve Bank suggested lending standards should be toughened up to slow the rapid housing price rises in Sydney and Melbourne.

The RBA said it was also concerned that increased competition among lenders could result in the issuing of riskier loans.

The minutes said dwelling investment rose by more than eight per cent in 2013/14 and is expected to strengthen in coming months, with loans for housing investors outstripping those made to owner occupiers.

The minutes also showed the RBA believes the Australian dollar still needed to fall further despite losing more than six per cent in value during September.

The RBA said that fall was mostly due to a rally in the US dollar against most major currencies.

“The recent depreciation followed a period when the Australian dollar had held up against the US dollar more than most other currencies,” the RBA said.

“The exchange rate remained high by historical standards – particularly given the decline in commodity prices.”

Commonwealth Bank senior economist Michael Workman said the drag on growth from the Australian dollar, is offsetting the benefits flowing from lower interest rates, such as a pick-up in residential construction.

“Recent speeches by RBA officials have indicated that another cash rate cut is unlikely given the risks of overstimulating the housing market,” he said.

RBC Capital Markets head of economics Su-Lin Ong expects the details from the next RBA board meeting might give a better picture on its future intentions.

The November meeting is often the most closely watched because the RBA has moved the cash rate at five out of the last seven Melbourne Cup day board meetings.

“While a change to policy rates will not occur, we may see more significant changes to the language although at this juncture the dropping of the key “stability in interest rates” phrase seems unlikely,” she said.

By Jason Cadden

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