Blue Rock’s Debt Advisory team is introducing their summary of the monthly Reserve Bank of Australia (RBA) meeting, which will help to keep you in the loop about what is happening in the Australian economy and what our guru, Jamie King expects to see in the future.
The RBA has decided to leave interest rates on hold for June, while keeping the cash rate at 2% in hope of encouraging sustainable growth and keep inflation consistent with the target. The Australian economy has continued to grow in previous months, however at a rate below its long term average. A key weakness is the declining business capital expenditure in both mining and non-mining sectors, which is likely to continue throughout the rest of this year. Furthermore public spending is expected to be subdued. Though, household spending has improved, including a large rise in dwelling construction and exports are rising, which are positive signs for the economy’s growth.
The RBA is set to release its revised economic forecast post their August meeting, with economists now uncertain about another rate cut, given recent fall in business investment figures for the March quarter from 4.4% to 2.4%. Furthermore, the RBA is concerned that the interest rate cuts were doing little to stimulate business investment in the non-mining sectors of the economy, whilst driving up housing prices in the overheated Melbourne and Sydney Property Markets. This issue was further highlighted on Monday by the Treasury secretary John Fraser who said Sydney's housing market, as well as parts of the Melbourne markets were showing "unequivocal" signs of a housing bubble. In turn, Australian Prudential Regulation Authority (APRA) is now working with the banks to cool the growth in the property, with the scaling back of discounted rate offerings on "Investment Home Loans". Stating that the property investors who previously were able to purchase two investment properties should only be able to afford one.
The low cash rate has also helped bring down the Australian dollar against its US counterpart, providing a boost to exporters and local companies, which have to compete with cheaper imports. The RBA, however, says the currency still has some way to fall. The Australian dollar has declined noticeably against a rising US dollar over the past year, though less so against a basket of other currencies. Further depreciation seems both likely and necessary, particularly given the significant declines in key commodity prices.
Therefore we’ll wait and see what the dollar does in the coming months and what the RBA decides after their August meeting. Meanwhile housing prices in Sydney and Melbourne should remain steady, as the RBA cracks down on property investments and higher risks loans.