THE interest rate easing cycle is over and rates will start to move up from the current rate of 2.5%, according to Urbis chief economist Nicki Hutley.
Hutley told the Australian Property Institute and Real Estate Institute of Victoria State of the Market conference that the prospects for the global and Australia economy are improving and the global risks are reducing.
She added the RBA took steps to respond to the deterioration in global conditions, the high Australian dollar and the pull back of mining investment, and those policies are taking effect. Since cutting rates, the $A is close to fair value ($A0.85 cents = $US1), business and consumer confidence has improved, which has translated to higher building approvals.
At the same time, the probability of a sharp deterioration in global conditions has reduced – although they are not gone.
Hutley said while the local economy faces challenges as it adjusts to lower mining capex – a reduction of $20 billion only represents 1.3% of GDP ($1.5 trillion). Hutley suggested there are several ways to fill that gap including:
· government increasing budget deficits;
· non-mining investment to increase by 10%;
· household consumption lifts by 2.5%;
· net exports to increase by 6% or imports to decrease by 6%;
· and housing sector investment up by 25%.
The latest RBA’s Statement on Monetary Policy released last Friday said while dwelling investment made only a minor contribution to growth in the economy over the year to the September quarter, a strong increase in approvals for residential building points to a pick-up in investment in the coming year.
“Over the past few months, there have been further signs that very stimulatory monetary policy is working to support economic activity.
“This is clearly evident in the housing market and indications are that dwelling investment will pick up in the coming quarters,”
“There have also been some recent signs of a modest improvement in consumer spending and a recent pick-up in business sentiment. These developments, and the depreciation of the exchange rate over recent months, suggest that there are reasonable prospects for activity outside the resources sector to pick up over time.
“Low lending rates and the continued strength in the established housing market are providing support to new dwelling activity. Nationally, housing prices have increased by around 10% over the past year, with recent increases broad based across capital cities,” the RBA said.
Meanwhile Hutley said inflation is unlikely to remain low in the year ahead, due to the impact of the depreciation of the $A and structural changes that are pushing up the costs for health, education, excise.
“So we can conclude that the likelihood of further rate cuts is small,” she said.
She predicted that the RBA is likely to increase rates in the December quarter.
Hutley’s inflation outlook was reaffirmed by the RBA’s Statement on Monetary Policy, which has revised the inflation forecasts higher in the short term.
The RBA said the higher forecast is “reflecting a combination of the lower exchange rate and the higher-than-expected December quarter CPI outcome, which have more than offset the effect of the softer outlook for wage growth,”
The RBA said the underlying inflation suggest that the quarterly pace picked up to between 0.75% and 1% in the quarter – around 0.25% higher than the assessment of underlying inflation a quarter ago. In year-ended terms, the pace of underlying inflation increased to be a touch above 2.5%.
Underlying inflation is expected to reach 3% over the year to June 2014, about 0.5% higher than forecast in November. Headline inflation is forecast to reach 3.25% over the year to June 2014.
The RBA said the depreciation of the $A since April 2013, has seen a rise in import prices, which firms are expected to pass through gradually to final retail prices.
AMP Capital’s head of investment strategy and chief economist Shane Oliver said the Statement on Monetary Policy clearly indicates the RBA has become a bit more optimistic about the growth outlook and a bit more concerned about inflation.
“As a result it has dropped its easing bias in favour of a period of stability in interest rates and now seems relaxed and comfortable about the $A. Our view remains that interest rates have hit bottom and are likely to be left on hold at 2.5% ahead of rate hikes starting around September/October this year,” Oliver said.
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