RBA eyeing housing market amid signs of lower rates working

The Reserve Bank is keeping a close watch on the housing market as it signals a willingness to sit on the sidelines while the "stimulatory effects" of previous interest rate cuts flow through to the economy.

The central bank kept open the chance of further easing, noting that there was uncertainty over the growth in non-mining business investment over the next year. But it also added that "there was mounting evidence that monetary policy was supporting activity in interest-sensitive sectors and asset values".

"[G]iven the lags with which monetary policy operates, the stimulatory effects would likely continue coming through for some time," the RBA said.

The central bank said "it was appropriate to leave the cash rate unchanged while continuing to gauge the effects, including in the housing market, of the substantial degree of monetary policy stimulus that had been put in place over the past two years".

The Australian dollar bounced back from the day's low of 93.53 US cents just before the minutes were released. It was buying 93.78 US cents just before mid-day.

Still jawboning on a lower exchange rate

The Reserve Bank appeared to show a preference for a weaker exchange rate to lowering the cash rate further, which could overheat the booming housing market. The central bank noted again that the Australian dollar "remained uncomfortably high".


"The stimulation [of the economy] needs to come from a lower currency," CBA senior economist Michael Workman said. He added at the strengthening housing market was stymieing the central bank's ability to cut rates to take some heat out of the Australian dollar.

"Cutting interest rates just has an unwelcome and most probably an unnecessary impact on the housing sector, which benefits home owners unnecessarily but increasing the value of their properties," Mr Workman said.

"You always have this problem in Australia where so much lending is done at the short-end. Variable rate loans are the norm. So if you keep cutting interest rates, you tend to overstimulate the housing market, and that's probably a problem for the them at this stage."

No cuts for some time?

Citi's chief economist Paul Brennan said it was not possible to rule out another rate cut by the RBA given the uncertainty over a pick-up in non-mining business investment.

"I think they basically think they've provided a substantial degree of policy stimulus and at this stage, they don't want to do anymore as they are seeing some signs of it working through the economy," he said.

"But equally they are quite unsure that how quickly the non-resources business investment will pick-up and they seem to be saying in the minutes that it's probably going to be a story for 2015."

The RBA repeated its expectations of below-trend growth in 2014. In the quarterly Statement on Monetary Policy (SOMP), released earlier this month, it downgraded the 2014 and 2015 growth forecasts amid weaker-than-expected mining investment.

It added that it was not yet clear when non-mining business investment would fill the gap.

"Members noted that while the timing of investment upturns was very difficult to predict, it appeared likely that growth of the economy over the coming year would be below trend but that growth could reasonably be expected to pick up thereafter," the minutes said.