PREVIEW: Rising House Prices, Steady AUD to Support Unch RBA Cash Rate

• Published on
• 03 Dec 2019, 08:59 AM

By Sophia Rodrigues

Between more monetary easing and an unchanged cash rate, the Reserve Bank of Australia is likely to opt for the latter as it judges a rate cut would unnecessarily hurt household sentiment and thus spending, thus offsetting any positive impact on spending from wealth effect of rising house prices.

The RBA’s decision to leave the cash rate on hold at 0.75% would also be helped by the exchange rate which is around 1.5% lower than a month earlier. Importantly, sentiment in global markets has improved in the past month, though last night U.S.-China trade tensions led to a renewed risk-off tone.

The RBA’s board meeting is due at 1430 hours local time later Tuesday. Both market and economists expect the rate to be left unchanged at 0.75%.

In the past month, economic data have been mostly on the weaker side and indicate that the economy’s progress towards full employment and inflation goals would be more gradual than the RBA expects. This means a stronger case for a rate cut could be made at this meeting than last month.

Among them was a smaller-than-expected rise in private sector credit growth in October which took the y/y growth to 2.5%, the lowest since April 2010.  Business credit posted the lowest rate of growth since April 2014 and other personal credit fell 4.7% y/y, the biggest fall in 10 years.

The unemployment rate rose to 5.3% in October as the number of employed fell for the first time since May 2018.  The jobless rate rose despite a fall in labor participation rate. The ANZ job ads survey – an important forward-looking indicator for the labor market – fell in November and the trend remains firmly in negative, suggesting employment growth would decline next year.

Building approvals, another important data closely monitored by the RBA, fell 8.1% m/m in October and 23.6% y/y, suggesting dwelling investment would continue to bea drag on GDP, probably more than the RBA has currently forecast.

Capital expenditure survey was also weaker than expected, posing downside risk for the RBA’s forecasts.

Yet the RBA is likely to decide in favor of leaving the rate unchanged, saying there is still a case to wait and assess the effects of the three rate cuts delivered earlier this year.

Rising house prices would be a key factor in the RBA’s decision for two reasons. The RBA is hoping that the wealth effect from higher prices would support household spending, and also support economy via its impact on other businesses, and new dwelling construction.

At the same time and despite comments to the contrary, the RBA is likely to closely monitor rising house prices for signs of over-exuberance, and would be cautious to add more fuel via another rate cut.

The RBA’s board meeting in February would provide them with a more opportune time to deliver an easing when there will be more data on house prices, and more evidence of where the global economy is heading via the behavior of global markets.

--Contact: sophia@centralbankintel.com