The RBA won't be happy about the dollar's recent strength ... Photo: Louie Douvis
Finding a balance between pushing for a lower Australian dollar while avoiding an overheating of the housing market is what will dominate the Reserve Bank board’s agenda at its meeting next week, economists say.
With a majority of economists and the market expect the central bank to keep the cash rate at its historic low of 2.5 per cent, the statement released after the board meeting will be closely watched for any indication on where the RBA stands on the recent strength in the currency, and of the recovery in the property sector.
... but cutting rates again risks overheating the housing market. Photo: Louie Douvis
The Reserve Bank has repeatedly said a lower currency would help Australia’s economy as it transitions away from mining-led growth. But its recent easing cycle, which was meant to stimulate non-resource sectors, has sparked strong growth in the housing market that could led to a bubble, analysts said.
“With the RBA characterising the degree of policy stimulus provided to the economy as ‘substantial’, would it be prepared to return to a dovish stance on the off chance that this would further deflate the currency?” Citi economists Paul Brennan and Josh Williamson wrote in a research note today.
"Such an outcome is highly unlikely, when doing so would arguably have better success in further fuelling the fire under the property market."
The booming housing market has seen capital city house prices rise 4 per cent in the three months to August, the largest growth since April 2010, while forecasts for next year and more bullish.
The rapid growth has been driven in part by investment properties, and Commonwealth Bank economists said the RBA would want to avoid too much property speculation by lowering rates again next week.
“While this is part of the plan to rebalance growth, as mining investment slows down, the RBA would not want to see housing prices or new lending rise too rapidly," HSBC's economists Paul Bloxham and Adam Richardson said.
“We expect the RBA to hold steady as worries about the high currency, which could have motivated a cut, are traded off against risks of over-inflating the housing market.”
Other economists said a dovish bias could be used by the Reserve Bank to point to continuing weakness in the labour market and in non-mining activity, and as inflation remains subdued.
“At this juncture, we do not expect a fresh easing bias to be acted on, but we’re of the view that the RBA needs to press the message that the next move is more likely to be down, not up, for the cash rate,” TD Securities’ head of Asia-Pacific research Annette Beacher said.
Despite the low expectations for an October easing, several economists still forecast the cash rate to fall to 2.25 per cent if Australia continues to experience ongoing weak data, and are favouring November as the next possible month for a cut.
Two economic indicators that are set to attract the attention of the Reserve Bank before the November meeting are the latest unemployment figures, released on October 10, and the September quarter inflation figures, out on October 23, Ms Beacher added.
The rise in labour underutilisation, the weakness in retail sales data and a slip in the annual rate of domestic demand growth would also weigh on the RBA’s mind in November, Goldman Sachs analysts said, adding they did not expect the recent “narrowly based bounce” in business confidence to be sustained.
“Overall, the tepid recovery in growth signalled by our current activity indicator is a concern for policymakers as the mining capex unwind intensifies,” they wrote in a research note late yesterday.
“Assuming ongoing disappointing activity indicators and a benign [third-quarter] 2013 CPI print, a November rate cut looks probable.”
Next week will see a busy economic calendar, with data to be released on private sector credit, retail trade, building approvals and the trade balance.
Financial markets are pricing in a 7 per cent chance of a cut to the cash rate at the RBA meeting on Tuesday, Credit Suisse data shows.
Economists who forecast a rate cut in the fourth quarter of this year, according to data complied by Bloomberg from September 12 to 17, include Westpac's Bill Evans, Goldman Sachs' Tim Toohey, JP Morgan's Stephen Walters and NAB's Alan Oster.