The RBA released their minutes today of the meeting where rates were cut to a record low 1.5% in August 2016.
They highlighted the property market and commented on both the slower rate of house price growth, and dwelling investment momentum.
Dwelling investment was expected to increase further, having grown strongly in recent years, although the contribution to output growth was expected to diminish over the forecast period. Building approvals had declined over the preceding year, but remained at high levels and had exceeded the amount of work completed. As a result, the number of dwellings under construction had increased to very high levels. Further, members noted that the pipeline of residential construction work, which included work that had not yet commenced, had increased the risk of oversupply in parts of the country. The outlook for the balance of supply and demand in the housing market was important for the inflation outlook because housing costs make up a significant share of the CPI basket.
Turning to the established housing market, members noted that most indicators pointed to an easing in conditions since late 2015. Recent data indicated that housing prices appeared to have grown modestly in the June quarter and had declined a little in most capital cities in July. Data on housing price growth from CoreLogic, which had been discussed at previous meetings, indicated that housing prices had increased very strongly in several cities in April and May. However, new information had revealed that these growth rates were overstated because of changes to CoreLogic’s methodology; data from other sources indicated that housing price growth had instead remained moderate in the June quarter. Other information showed that, while auction clearance rates had recently picked up a little in Sydney and Melbourne, the number of auctions was lower than in the preceding year and the average number of days that properties were on the market had increased. Housing credit growth had been little changed in recent months and remained below that of a year earlier. Rent inflation had declined to its lowest level since the mid 1990s and the rental vacancy rate had drifted higher to be close to its long-run average.
In addition, they think inflation will rebound, later. However there is significant uncertainty.
Members noted that there was little change in the forecast for underlying inflation. The central forecast was still for inflation to remain around 1½ per cent over 2016 before increasing to between 1½ and 2½ per cent by the end of the forecast period. The substantial depreciation of the exchange rate over recent years was expected to exert some upward pressure on inflation for a time and inflation expectations were assumed to return to longer-run average levels. The forecast increase in underlying inflation also reflected the expectation that strengthening labour market conditions would lead to a gradual rise in growth in labour costs. In particular, members noted that growth in average earnings had been low given the spare capacity in the labour market. Moreover, growth in average earnings had been affected by lower wage outcomes in sectors related to the mining industry as a part of the process of adjusting to the lower terms of trade and the end of the mining investment boom. Both of these effects were expected to wane over the forecast period. Members noted that there continued to be considerable uncertainty about momentum in the domestic labour market and the extent to which domestic inflationary pressures would rise over the next few years.
The exchange rate of course has remained pretty strong and is higher than this time last year. So, expect lower inflation for longer.
