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Interest rates on the move?
The Reserve Bank Governor has delivered a speech at the Anika Foundation in Sydney. The Reserve Bank Governor has provided the clearest message yet that while super low interest rates are providing a boost to the economy, there is “no impediment to further easing if needed”. The inflation data last week has not changed the central bank’s views on the scope for further rate cuts.
- The tone and comments from the speech is consistent with CommSec’s view that the cash rate will be cut by 25 basis points next Tuesday. The Aussie dollar fell from US91.60c to US90.80c during the speech.
- Dwelling approvals consolidate: Dwelling approvals fell by 6.9 per cent in June after falling by a revised by 4.3 per cent in May (previously a 1.1 per cent fall). Approvals are down 13.0 per cent over the year.
- House approvals are down 1.3 per cent in June (private sector down 1.2 per cent). ‘Lumpy’ apartment approvals fell by 15.2 per cent in June.
What does it all mean?
- The Reserve Bank Governor has delivered his clearest statement yet that super low interest rates are likely to be part of the economic landscape over the coming year. The speech was certainly not your stock standard central bank speech. Rather his comments today provided more clarity around a rather subdued inflation environment, surprising lack of business confidence, higher savings rates and reinforced our view that interest rates are likely to fall further over the near term. In particular it was clear that the central bank was not concerned about running out of rates “ammunition”.
- The clear sense from today’s speech is that Reserve Bank officials believe that the low rate environment is providing a degree of support to the broader economy, however not enough to offset the pullback in mining investment and as such policymakers are willing to do whatever it takes to rebalance the economy. And the dovish comments certainly took on an added degree of strength with the Governor commenting that the central bank would not be averse to considering additional policy tools.
- Effectively the Governor removed the few hurdles that analysts and economists have discussed as key reasons to not provide further rate cuts. The current inflation environment is subdued, while growth in asset (house) prices remains comfortable.
- Interestingly the Governor did talk down the Aussie dollar suggesting that a further decline in the currency would not be a surprise and that the outlook for the currency did hinge on commodity prices.
- One could gather that this speech was essentially a jaw boning tactic to talk down longer term rates while also pushing the currency low – effectively doing part of the job for the central bank without policymakers having to shift rates. But it is likely that a rate cut next week is now the most likely outcome – showing that the Reserve Bank is clearly willing to do whatever it takes to support confidence and activity
- Building approvals have edged lower for the second straight month in June. And while the near 7pct slump in total approvals in just one month looks concerning, delve a little deeper and the breakdown doesn’t look as drastic. The weakness was largely driven by “lumpy” apartment approvals which slumped by over 15 per cent in June while private sector house only recorded its first fall in six months – a modest 1.2 per cent slide. In fact the all-important house approvals are up 10 per cent on a year ago
- There is a lot of hand-wringing about home building and the extent of the recovery but the figures show activity is near “normal”. The number of approvals are holding around 3 per cent below decade averages
- Over the past few months there have been clear signs of an improvement in housing activity. Low interest rates strong population growth, healthy employment, and pent up housing demand is starting to see the housing sector shake of the shackles and begin a much needed resurgence. Granted it is early days, but the sector look to be on a healthy recovery path.
- The key is what happens in the private sector home building market. And over the past six months it has shown healthy growth. Home approvals eased from the best levels in two years in June. And other indicators like new home sales and house prices suggest that the housing sector is gathering momentum.
What do the figures show?
Comments from the RBA Governor’s speech.
- “One of the things we have been watching for as we have been reducing interest rates has been an indication of savers shifting portfolios towards some of the slightly more risky asset classes, as that is one of the expected and intended effects of monetary policy easing. There are clearly signs of policy working in this respect, though not, to date, by so much that we see a serious impediment to further easing, were that to be appropriate from an overall macroeconomic point of view. “
- “Business capital spending outside the resources sector has been subdued; housing investment likewise has been on the low side. There is ample scope for both to rise. This is by no means a certainty though and while there are signs of an increase in dwelling investment getting under way, a stronger trend in non-resources business investment looks like it is a while off yet”.
- “It is somewhat concerning that the business community’s confidence has been quite subdued in recent times. To the extent that substantial structural change has been occurring, and there is inevitable uncertainty over the international outlook, it is quite understandable that some business segments have found the going hard and don’t feel very confident”. “That said, it would be good if there was a bit more confidence in the business community about the future”.
Building Approvals:
- Dwelling approvals fell by 6.9 per cent in June, after a revised 4.3 per cent fall in May (previously 1.1 per cent). Approvals are down 13.0 per cent on a year ago.
- The current number of dwelling approvals (12,778) is below the decade average (13,404).
- House approvals fell by 1.3 per cent in June (private sector down 1.2 per cent). Meanwhile ‘lumpy’ apartment approvals fell by 15.2 per cent after falling by 12.5 per cent in May and rising by 28.9 per cent in April.
- House approvals are up 10.0 per cent over the past year while apartments are down 36.1 per cent.
- The value of all commercial and residential building approvals fell by 10.9 per cent in June after rising by 2.3 per cent in May. Residential approvals fell by 0.7 per cent with new building down 0.9 per cent and alterations & additions up 0.4 per cent. Commercial building fell by 23.2 per cent in June after rising by 8.0 per cent in May.
- The Bureau of Statistics’ monthly Building Approvals release contains figures on local council approvals to build residential structures such as homes and units as well as commercial premises such as offices and shops. Approval is one of the first stages of the construction ‘pipeline’ and is thus a key leading indicator of future activity. An increase in approvals would point to stronger future activity for construction-related companies.
- A sustained lift in building approvals would be beneficial for the broader economy, given it is a key forward looking indicator. More approvals leads to more homes being built over the medium term, and will provide additional support to the overall economic growth. The key is ensuring that there is enough new stock coming onto the market place to prevent an upward surge in prices. At present it does seem like demand for housing is matching supply and there is no reason for concern.
- The Reserve Bank will continue to maintain an easing bias, although policymakers will be thinking long and hard about the benefits of multiple rate cuts – particularly given the recent falls in the Australian dollar.
What is the importance of the economic data?
- The Bureau of Statistics’ monthly Building Approvals release contains figures on local council approvals to build residential structures such as homes and units as well as commercial premises such as offices and shops. Approval is one of the first stages of the construction ‘pipeline’ and is thus a key leading indicator of future activity. An increase in approvals would point to stronger future activity for construction-related companies.
- A sustained lift in building approvals would be beneficial for the broader economy, given it is a key forward looking indicator. More approvals leads to more homes being built over the medium term, and will provide additional support to the overall economic growth. The key is ensuring that there is enough new stock coming onto the market place to prevent an upward surge in prices. At present it does seem like demand for housing is matching supply and there is no reason for concern.
- The Reserve Bank will continue to maintain an easing bias, although policymakers will be thinking long and hard about the benefits of multiple rate cuts – particularly given the recent falls in the Australian dollar.
What are the implications for interest rates and investors?
- A sustained lift in building approvals would be beneficial for the broader economy, given it is a key forward looking indicator. More approvals leads to more homes being built over the medium term, and will provide additional support to the overall economic growth. The key is ensuring that there is enough new stock coming onto the market place to prevent an upward surge in prices. At present it does seem like demand for housing is matching supply and there is no reason for concern.
- The Reserve Bank will continue to maintain an easing bias, although policymakers will be thinking long and hard about the benefits of multiple rate cuts – particularly given the recent falls in the Australian dollar.