The Reserve Bank has as expected decided to again leave official interest rates on hold at its first meeting for 2014. Rates have now been steady since the decision by the Bank in August last year to cut rates to a 60 year low of 2.5 percent.
Recent economic data however remains mixed with the Bank likely to remain on the sidelines until a clear trend in economic activity emerges – particularly in regard to unemployment.
Employment growth remains weak particularly in New South Wales and Victoria with unemployment rates expected rise in those states over the near-term.
Inflation is also on the rise again which will be exacerbated by a lower dollar which is expected to continue its recent downward trajectory, particularly as the US economy strengthens.
Low interest rates continue to have a stimulatory effect on the housing market. Home building approvals increased over November although much of the rise was again for apartments in Sydney and Melbourne.
Increased competition for market share between banks continues to push down already low mortgage rates with home buyer activity strengthening as a consequence. All capital city markets reported a rise in median house prices over the December quarter for the first time in four years with prices growth in the Sydney market approaching record levels.
“The Reserve Bank has as expected decided to leave interest rates on hold at its first meeting for 2014. Recent economic data remains conflicting for interest rate policy with weak employment growth offset by a falling dollar and rising inflation. The Bank will also be aware of strengthening housing market activity, particularly in Sydney where prices growth has approached record levels.
Rising unemployment will be the catalyst for any future cut in interest rates although this is unlikely in the near-term as the bank awaits a clearer picture of the nature of current and prospective economic activity as relevant data emerges”, says Dr Andrew Wilson Senior Economist for Australian Property Monitors.