ANZ pushes back its RBA rate hike call on housing market weakness

Getty/Matt CardyIt’ll be a slow rate tightening schedule, says ANZ.
  • Australia’s housing market downturn will larger that previously expected and while that’s unlikely to derail the Australian economy, it will see the RBA hold off raising official interest rates until the middle of next year, according to ANZ’s Australian economics team.
  • Despite the prospect of stronger economic growth leading to lower unemployment and a pickup in wage and inflationary pressures, ANZ says the RBA is unlikely to lift the cash rate at a time when home prices are still falling.
  • It sees the RBA hiking twice in 2019 — now in August and November — before leaving the cash rate steady at 25% throughout 2020.

Australia’s housing market downturn will be larger than ANZ previously expected. And while that’s unlikely to derail the Australian economy, it will see the Reserve Bank of Australia (RBA) hold off raising official interest rates until the middle of next year.

“Weakness in Australia’s housing market has persisted longer than we expected,” said ANZ’s Australian Economics Team, lead by David Plank, in a note released today.

“We have revised our forecasts and now expect to see peak-to-trough price declines of around 10% in Sydney and Melbourne, with smaller declines elsewhere.”

Here are the bank’s updated dwelling price forecasts by individual capital city for this year and next.

ANZ Bank

“Our updated forecasts show house prices falling until the end of 2018 and then stabilising in the first half of 2019,” ANZ says.

Rather than weakening demand or higher mortgage rates, ANZ says the latest downturn has, and will continued to be driven, by tighter home loan lending standards.

However, given the slowdown has not been caused by higher interest rates, it thinks its effect on the broader Australian economy will be less than what would normally be the vase.

“[This] reflects the fact that the source of house price weakness is a regulatory induced tightening in the supply of credit rather than one triggered by RBA rate hikes,” it says.

“We think this has a less pervasive impact on the economy than falling house prices brought about by higher interest rates would have. Not least because much of the impact of tighter credit supply is centred on Sydney and Melbourne rather than being country wide.”

While falling house prices will weigh on household spending through a decreased wealth effect, ANZ thinks there will be offsetting factors that should keep GDP growth just above its potential level, seen by many as around 2.75% or slightly higher.

Potential growth refers to the level which leaves inflation broadly stable.

“We think for 2018 GDP growth will stay around the 3% level reached in Q1,” ANZ says.

“We expect similar growth in 2019, before a slowdown in government spending, investment and net exports sees growth drop to around 2.5% in 2020.”

As such, ANZ says growth of this magnitude will likely see Australia’s unemployment rate fall to 5% by the end of 2019, helping to gradually lift wage and inflationary pressures.

“The improvement in wage growth is expected to be gradual, with annual growth in the Wage Price Index lifting to 2.4%, 2.6% and 2.9% by the end of 2018, 2019 and 2020 respectively,” it says.

“The lift in wages helps the outlook for inflation, with core inflation lifting to an annual pace of 2.3% by the end of 2020.”

However, while such a scenario suggests the RBA may begin to lift official interest rates sooner than some expect, ANZ says the bank will likely be reluctant to increase borrowing costs at a time when home prices are still likely to be falling.

“We think the housing market’s path will influence the RBA’s policy deliberations,” it says.

“We think that our expectations — a decline in unemployment toward 5%, a gradual acceleration in wages and a lift in core inflation above 2% — support the case for a higher cash rate at some point. But the weaker outlook for housing will also matter, in our view.

“While the RBA doesn’t focus on house prices specifically, we doubt it will be comfortable tightening if house prices are still falling as that would add to the downside risks for the economy at a time when the inflation outlook doesn’t require an aggressive approach.”

As such, it now sees he RBA delivering its first rate hike since late 2010 in August next year, three months later than its previous forecast.

“We now think it more likely that the RBA will wait a little longer before tightening, not only to ensure that the housing market has stabilised but also to ensure that the unemployment rate gets closer to 5%,” it says.

“We have shifted the timing of the first rate hike to August 2019, with a second hike in November, [avoiding a] possible May election.”

ANZ says the increase in borrowing costs will likely lead to renewed and modest weakness in the housing market, an outcome it believes will see the RBA leave its official cash rate steady at 2% throughout 2020.

Financial markets aren’t fully priced for a 25 basis point increase in the cash rate until November 2019.

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