The Reserve Bank released minutes from its July meeting earlier this afternoon. As expected, the RBA sprung no surprises on the markets. The bank made little indication on the future of its rate policy.
What did we learn? Nothing we didn’t know already. The RBA held rates at 2% last month on the back of the Aussie dollar’s decline.
Since the RBA last cut rates in May, the dollar has fallen to a six-year low. It’s sitting just above this low today, trading at US$0.739. Nonetheless, the dollar’s 5% depreciation against the greenback was enough to offset falling commodity prices. And that, in its view, was enough to keep rates on hold last month.
Beyond that, the RBA’s outlook on the housing market was the only other thing of note to glean from the minutes.
The RBA noted that stricter bank lending practices should ease risks associated with Australia’s overheating housing market. But they did suggest it’s too early to make any conclusions about the success of these new banking regulations.
Industry watchdogs APRA have instructed banks to raise capital to offset home loan lending from 2016. Banks are slowly adapting to this measure, but not quickly enough. Some have taken the step to increase interest rates for investor loans by 0.25%.
Slowing investor lending is important to the RBA because it dictates their rate setting policy.
The bank wants a lower dollar to boost exports. The quickest way is to lower rates again. But it doesn’t want this spilling over into the housing market. After all, the low interest rate environment is a big part of high, unaffordable house prices.
The RBA supports APRA’s stance then because it hopes these measures can limit house price growth. If successful, the RBA could then maintain interest rates at 2%.
On that, the RBA did make note of strong housing market conditions in Sydney and Melbourne. It also said it expects dwelling investments to rise over the next few quarters.
US interest rates to weigh on RBA decision making
If there’s one thing the RBA is keeping a keen eye on, it’s the US Federal Reserve. In fact, markets worldwide are waiting on the Fed to make its first move. Many predict a September hike as the likeliest outcome.
Even though markets expect a rate rise, the RBA still thinks it’ll weigh heavily on major currencies. The RBA writes:
‘It was likely that financial market volatility would increase and the US dollar could appreciate further, including against the Australian dollar and a number of other currencies in Asia’.
It’s early to tell, but a US rate hike could send the Aussie down below US$0.70. Of course that’s exactly what the RBA hopes for. They don’t know any other way. They need something to prop up exports. Only a lower dollar provides the kind of boost necessary to lift net exports.
But we need to question the timing of the rate rise. There are still too many clouds hanging over the US economy.
The US economy shows mixed economic growth, at best. Retail sales did rise last month, but consumer confidence is below expectations. At the same time, employment figures failed to match expectations last month.
That doesn’t suggest the US economy is improving. It suggests the opposite.
And that’s before we consider the impact of China’s yuan devaluation too. More competitive Chinese exports hurt US exports. This, as much as anything, could force the Fed’s hand in maintaining near-zero rates.
Where does that leave us then?
We have two possible scenarios for the rest of the year.
One is status quo, where the Aussie dollar trends between US$0.72–0.77.
The other involves higher US interest rates. That could leave the AUD trading in a band anywhere between US$0.68–0.72. Without doubt, it would boost exports in the medium term. But will it be enough to offset falling commodity prices? The signs aren’t good.
Goldman Sachs revealed that it expects iron ore prices to fall by 30% over the next 18 months.
That leaves us with a weaker dollar, declining commodity prices, rising house prices, and little real benefit to the economy. That’s modern day Australia for you.
Contributor, The Daily Reckoning
PS: In response to APRA demands, banks are limiting lending practices to investors. But that’ll only push up house prices in the future. The Daily Reckoning’s property expert, Phillip J. Anderson, isn’t surprised by this.
He reckons house prices are set to boom over the next decade.
Phil’s 20 years of experience as a property analyst and advisor has given him a keen sense for where the property market is, and where it’s going. He predicted a housing market crash in 2008. He also went against the mainstream in 2009, saying house prices would go on to boom this decade.
He was right on both accounts.
In a free report ‘Why Australian Property is on the Verge of a Decade Long Boom’, Phil guides you through this coming decade. He’ll show you the right time to buy property at its cheapest, and how you can use this to time your investments. To find out how to download his free report, click here.