Reserve Bank holds rates for 9th straight month

The Reserve Bank has kept rates on hold at a record low 2%, amid a volatile share market and continuing unrest on global markets.

At its first board meeting of the year, the RBA signalled no change in the official cash rate for the 9th straight month.

The widely-tipped decision comes amid a slumping Chinese economy and a shocking start to the year’s trading on the ASX.

In a statement on the decision RBA Governor Glenn Stevens says Australia’s terms of trade are continuing to decline on the back of falling commodity prices.

“Financial markets have once again exhibited heightened volatility recently, as participants grapple with uncertainty about the global economic outlook and diverging policy settings among the major jurisdictions,” he says.

“At today’s meeting, the Board judged that there were reasonable prospects for continued growth in the economy, with inflation close to target. The Board therefore decided that the current setting of monetary policy remained appropriate.”

Which way for interest rates in 2016?

Just over half of respondents to a finder.com.au survey of leading economists predicted rates would not drop lower than the current 2% level in 2016.

The last time the RBA cut the official cash rate was in May 2015.

Borrowers are encouraged to do their research when considering buying a property or refinancing.

Finder.com.au consumer advocate Bessie Hassan says the survey shows a further economic downturn in China will leave Australia at risk of recession.

“The experts were divided on whether the recent slowdown in China’s economy would impact on the Australian property market,” she says.

“The Australian property market is not one entity and the jury is out as to how much influence Chinese foreign investment has on property prices.

“Regardless, borrowers are encouraged to do their research when considering buying a property or refinancing.

She says borrowers should start preparing for any future interest rates rises now, with one in four economists predicting a rate rise this year.

“With rates forecasted to start this climb, it’s time to crack down on your home loan repayments. Any portion of your principal you can get rid of now is a portion you’ll avoid paying interest on once your repayments increase.

Heat coming out of property market

CoreLogic RP Data head of research Tim Lawless says the housing market is moving exactly as the RBA wants, with dwelling values across Australia’s combined capital cities down 0.6% in the past three months.

He says the market is losing steam without values collapsing completely.

We may see the cash rate move lower later in the year.

“The RBA probably doesn’t need to worry too much about over stimulating the housing market via another rate cut; mortgage rates are already higher than a year ago due to the higher capital requirements implemented by APRA and the pace of investment growth has fallen below APRA’s 10% speed limit imposed in December 2014,” Lawless says.

“Other factors adding to the hold argument were likely to have been around labour markets which have been showing a healthy trend based on the Bureau of Statistics data and retail sales showing a better appetite for households to spend.

“With heat in the housing market no longer likely to be a major concern for the RBA, a major obstacle has been removed from preventing rate cuts and we may see the cash rate move lower later in the year.”

Melbourne the best performing capital

As the heat comes out of the property market, Melbourne has trumped Sydney as the best performing capital city for dwelling values rises in the past 12 months.

The latest CoreLogic RP Data Hedonic Home Value Index for January shows Melbourne dwelling values rose 11% in the 12 months to January 31, 2016, slightly ahead of Sydney which saw a 10.5% increase.

Sydney’s housing market is now playing second fiddle to Melbourne’s.

Perth recorded the biggest loss with –4.1% growth in values for the year. Things did pick up in the west toward the end of the year with a 1.7% rise in dwelling values for the rolling quarter to January 2016.

Change in dwelling values to January 31, 2016

“While still a high rate of annual growth, Sydney’s annual rate of capital gain is now at a 29-month low and has been progressively softening since peaking at 18.4% in July last year,” Lawless says.

“Melbourne’s housing market has been more resilient to slowing growth conditions which has propelled the annual growth rate to the highest of any capital city, with dwelling values 11.0% higher over the past twelve months.

“Previously, during the height of the growth phase, there was a large separation between Sydney’s housing market, which was streaking ahead, and Melbourne’s, where the rate of capital gain was substantial but still well below the heights being recorded in Sydney.

The latest data reveals Sydney’s housing market is now playing second fiddle to Melbourne’s, at least in annual growth terms.”