AMP Shane Oliver pencils in another rate hike in December and expresses concern about housing affordability
By Jill Fraser for Lending Central
Economists are split on whether the RBA will raise rates again in December. AMP Capital Investors’ chief economist, Shane Oliver told Lending Central that it’s a close call, largely based on economic data which is due to be released over the next few weeks.
(ABS Labour Force figures, business consumer confidence data, employment data, housing finance figures are all coming out this week.)
Risks to inflation and the danger of generating other imbalances in the economy as a consequence of leaving interest rates at low levels are likely to continue to push the cash rate up.
Oliver notes “while the Reserve Bank’s Statement on Monetary Policy revised up its GDP forecast for 2010 to 3.25% from 2.25% and its inflation forecast for 2010 to 2.25% from 2%, this had already been pretty well flagged and so is no surprise.
He says, more importantly, the RBA has indicated that, with spare capacity being less than earlier thought and growth on it way back to trend, further interest rate increases are likely on the way. However, it is continuing to indicate that the process of raising interest rates will be gradual.
“We are allowing for another 0.25% rate hike next month as opposed to leaving rates on hold, but with inflation still expected to fall to within the target zone and with retail sales slowing after the stimulus induced boost it is a close call.
“In this context, data for consumer confidence, employment and business investment over the next few weeks will be watched pretty closely by the RBA Board in deciding what to do when it next meets on December 1. Either way, we continue to see the cash rate rising to 4.5% by mid next year,” says Oliver.
“Leaving rates at this low level could eventually foster a housing boom,” says Oliver noting that a flow on from interest rate rises will be a drop in housing affordability. He maintains that they will start heading back in the direction of the lows we saw through early last year.
“There’s no doubt that affordability is a major problem,” he says referring to it as the “big negative” that will arise from rate hikes.
Oliver believes that house prices will slow but not fall.
“It will be the low end of the market that will suffer initially when the first home owners boost is wound back and mortgage rates rise. The top end still has more momentum and will continue into next year. But overall I don’t see strong gains in prices.
“I think they’re going to be low single digit gains over the next 12 months. But there will be a divide between reasonable gains in the medium to upper end and falls in the lower end.
“Generally I think we’re in for an extended period where housing prices bounce up and down around current levels,” he says.
Globally he says US economic indicators continue to point to economic recovery. US profit results are looking pretty impressive, the key being that companies are now starting to beat revenue expectations as well as profit expectations suggesting that the profit recovery is broadening out from just reflecting the benefit of cost cutting. This augurs well for a further improvement in profits going forward.
Chinese economic data has confirmed that its recovery is on track, with GDP growth being an impressive 8.9% over the year to the September quarter. China’s growth is becoming more dependent on domestic demand and its recovery looks a lot broader than just increased public investment spending so China’s growth outlook is promising, which is good news for Oz.
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Ted November 11, 2009
RBA should walk a very straight line for a period. It is all very well to state that there are concerns about inflation, but, the main features as I see it at the present are:
- unemployment
- australia is the only country to increase rates of late, albeit from a much higher base than comparable countries
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