Welcome to another instalment of BlueRock’s Debt Advisory team’s summary of the Reserve Bank of Australia’s (RBA) monthly meeting. Our guru, Jamie King who has ten plus years of experience in banking, discusses the ramifications of the meeting and what he expects to see in the future.
The target cash rate remains unchanged at 2%, despite some speculation that there may be the second rate cut for the year. This arose as a result of the exponential decline of some key commodities, which puts increasing pressure on the Australian financial landscape. Meanwhile the global economy continues to expand at a modest pace.
The RBA is expected to commence increasing its policy rate, later this year. However, global financial conditions remain very accommodative, as international major central banks continue to ease monetary policy, in an attempt to boost consumer confidence. Despite recent economic turmoil in Greece and China, and subsequent fluctuations in the associated markets, long-term borrowing rates for most sovereigns and creditworthy borrowers remain unusually low, therefore making it a good time to borrow.
In Australia, all signs are suggesting that the local economy continues to grow at a sluggish pace over the last year. The rate of unemployment, whilst elevated, has remained somewhat unchanged recently. Similarly, there has been very slow growth in labour costs, and inflation is forecasted to remain consistent with the target over the next one or two years, even as the exchange rate continues to decline. Overall, the economy is expected to operate with a degree of spare capacity for some time to come.
The continued interest rate decline is in line with speculation, and is acting to encourage borrowing and spending. Credit continues to grow steadily, with stronger borrowing by businesses and growth in lending to the housing market. Dwelling prices continue to rise consistently in Sydney and Melbourne, however these trends have been varied in other major Australian cities. The Australian Prudential Regulation Authority (APRA) along with the banks, continues to asses and contain risks that are arising in the rapidly expanding housing market, especially in relation to investment properties and investment loans.
The Australian dollar continues to decline noticeably against a rising US dollar in the past year, however less so against other major currencies. Further depreciation in the AUD seems necessary, and very likely, given falls in key commodity prices.
Stay tuned for the next edition after the RBA’s meeting on August 4th.