Property weakness may slow further rate rises

As widely forecast, the Reserve Bank has lifted interest rates for a historic fourth month in a row, pushing the cash rate up by 0.50% to 1.85%, a six-year high.

The RBA under Governor Philip Lowe has now raised the cash rate by 1.75 percentage points in four months to its highest level since June, 2016.

A 0.50% rate rise was made inevitable by the June quarter’s annual Consumer Price Index reading of 6.1% last week and forecasts from the Federal government that it could get to 7.7% by year’s end.

But the tone of the statement differed from the statements after the May, June and July decisions and left a feeling in the markets that the time for big rate rises had passed and that smaller increases would now follow, though not straight away.

That’s why the ASX recovered from a small loss to a small gain in the hour after the 2.30pm decision and why the value of the Aussie dollar dropped back under the 70 US cent mark it has recovered to.

The ASX 200 index ended at 6,998.10, up 37 points from the level just before the 2.30pm release of the RBA statement and nearly 50 points from the day’s low of 6,949 at 12.15pm

Some economists said there was an absence of surprises in the statement – the cuts to economic forecasts and the higher estimate for inflation were all well-signalled by the Governor before the meeting on Tuesday.

The response from AMP Chief Economist, Shane Oliver told the story of the market reaction to the RBA statement. He wrote Tuesday afternoon, after the Governor’s statement:

“Market & consensus expectations for the cash rate to rise above 3% are too hawkish as: global supply pressures on inflation appear to be easing …We see the pace of cash rate hikes ahead slowing down with the cash rate peaking around 2.6% either at the end of this year or early next year, which is at the low end of market and economists’ expectations.

“Rates are likely to be falling in the second half of next year.”

In yesterday’s bank statement, Governor Lowe said the new forecast for the CPI from the bank is 7.75% “through the year” which means the actual rate could be a touch higher by the end of 2022.

Lowe said the bank forecast the CPI would slow to 4% over next year and 3% over 2024.

In a substantially recast post-meeting statement (which changed the emphasis on overseas factors for example and played up the centrality of consumer spending), Dr Lowe said:

“The Board places a high priority on the return of inflation to the 2–3 per cent range over time, while keeping the economy on an even keel,” the first time that statement has been made in a statement.

“The path to achieve this balance is a narrow one and clouded in uncertainty, not least because of global developments.

“The outlook for global economic growth has been downgraded due to pressures on real incomes from higher inflation, the tightening of monetary policy in most countries, Russia’s invasion of Ukraine and the COVID containment measures in China.”

“Inflation in Australia is the highest it has been since the early 1990s. In headline terms, inflation was 6.1 per cent over the year to the June quarter; in underlying terms it was 4.9 per cent. Global factors explain much of the increase in inflation, but domestic factors are also playing a role.

“There are widespread upward pressures on prices from strong demand, a tight labour market and capacity constraints in some sectors of the economy. The floods this year are also affecting some prices.”

“A key source of uncertainty continues to be the behaviour of household spending. Higher inflation and higher interest rates are putting pressure on household budgets.

“Consumer confidence has also fallen and housing prices are declining in some markets after the large increases in recent years. Working in the other direction, people are finding jobs and obtaining more hours of work.

“Many households have also built up large financial buffers and the saving rate remains higher than it was before the pandemic. The Board will be paying close attention to how these various factors balance out as it assesses the appropriate setting of monetary policy.

Besides reworking the inflation forecast, economic growth has been downgraded as well by the bank

“The Bank’s central forecast is for GDP growth of 3¼ per cent over 2022 and 1¾ per cent in each of the following two years… The Bank’s central forecast is for the unemployment rate to be around 4 per cent at the end of 2024.”

“Our liaison program and business surveys continue to point to a lift in wages growth from the low rates of recent years as firms compete for staff in the tight labour market.”

The wording of the important final paragraph was also changed in the latest statement to emphasise that the rate rise “is a further step in the normalisation of monetary conditions in Australia” instead of being described as it was in the July statement “as a further step in the withdrawal of the extraordinary monetary support that was put in place to help insure the Australian economy against the worst possible effects of the pandemic.”

The statement added that “The increase in interest rates over recent months has been required to bring inflation back to target and to create a more sustainable balance of demand and supply in the Australian economy.”

“The Board expects to take further steps in the process of normalising monetary conditions over the months ahead, but it is not on a pre-set path” which was a new phrase in the statement as well.

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Meanwhile, there was further confirmation of the continuing weakness in the local housing market from ABS data on building approvals and housing finance for the month of June.

Building approvals are more advanced in their slide – down nearly 20% in the year to June, while housing finance is only off 2% in the same time, thanks to a near 10% fall in loans to owner-occupiers over the year.

By contrast lending to investors was still up 17% in the year to June, even though investor loans dropped 6.3% in the month against a 3.3% fall in loans to owner occupiers.

Looking first at approvals and Australian Bureau of Statistics data showed that there was a small 0.7% dip in the total number of dwellings approved in June (seasonally adjusted terms in June).

That followed the surprising 11.2% rise in May which economists put down to local governments cleaning up their backlogs and pushing through applications, especially for non-private dwellings (units, apartments etc).

ABS head of construction statistics at the ABS Daniel Rossi said fall in the total number of dwellings approved in June “was driven by a fall in approvals for private sector dwellings excluding houses, which dropped 5.7 per cent.”

“Approvals for private sector houses rose 1.2 per cent in June, following a 2.1 per cent fall in May.”

The value of new loan commitments for housing fell 4.4% in June 2022 (seasonally adjusted) but the ABS said it still “remained at a historically elevated level of $31.0 billion.”

The ABS head of Finance and Wealth Katherine Keenan said: “The value of new owner-occupier loan commitments fell 3.3 per cent in June 2022, while new investor loan commitments fell 6.3 per cent. These falls followed rises in May, attributed to a clearing of application processing backlogs by lenders.

“Even with the June falls, the value of new owner-occupier loan commitments remained 50 per cent higher than the pre-pandemic level in February 2020, and the value of new investor loan commitments remained 101 per cent higher.”

“The average approval value for new houses continues to rise year on year, since passing $400,000 in April 2022. The average approval value for a new house in June was $408,782, roughly $67,500 higher than the year before and $78,500 higher than June 2019”.

This reflects a year-on-year rise of 19.8% for June 2022, following weaker rises of 2.6% for June 2021 and 0.7% for June 2020 when the economy was trapped in the first wave of lockdowns and Covid infections.

Across Australia, the number of dwelling approvals rose (seasonally adjusted) rose to be up 6.3% in Victoria, 1.7% in WA, by 1.5% in NSW and Tasmania (1.0%). Dwelling approvals fell 10.1% in South Australia and 2% and Queensland.

The value of total building approved fell 4.7% in June after May’s 10.8% rise.

The value of total residential building fell 3.7% that comprised a 3.9% fall in the value of new residential building approved and a 2.2% drop in the value of alterations and additions.

The value of non-residential building fell 6.1% in June, following May’s 17% jump.