RBA poised to hold rates as house prices start to turn up

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The Reserve Bank is poised to give home buyers and federal Treasurer Jim Chalmers another month of relief from higher interest rates despite ongoing inflation pressures and warnings from the nation’s biggest lender of a possible surge in house prices.

Financial markets say there is a 100 per cent chance the RBA board will hold the official cash rate at 3.6 per cent when it meets on Tuesday.

The Commonwealth Bank says the property market has bottomed. It predicts a 3 per cent lift in prices this year.Credit: Flavio Brancaleone

The bank has never moved interest rates when financial markets have given a zero chance of a change. Most economists also tip the RBA to hold rates steady for a second consecutive month.

It was in May last year, just ahead of the federal election, when the Reserve Bank started lifting interest rates in a bid to cool the economy and reduce inflation, which peaked at 7.8 per cent in December. It has now eased to 7 per cent.

After last month’s meeting, where the board held rates steady for the first time in a year, governor Philip Lowe said a further tightening of monetary policy “may well” be needed to get inflation under control.

The bank is closely watching the state of the global economy, spending by households, the outlook for the jobs market and inflation. The RBA does not expect inflation to be back inside its 2 to 3 per cent target until the second half of 2025.

Job figures last week showed unemployment steady at 3.5 per cent. Almost 117,000 jobs were created in February and March.

But ANZ’s measure of job advertisements, released on Monday, shows a 0.3 per cent fall in April after a downwardly revised 2.7 per cent drop the previous month.

Job ads are now 7.7 per cent down from their peak in September. But they are 52.5 per cent up on their pre-COVID level.

Senior ANZ economist Catherine Birch said the jobs market was still strong.

“The level remains very high, signalling significant unfilled labour demand, and is consistent with solid employment gains,” she said.

But research by JP Morgan economist Jack Stinson suggests the labour market is about to sour.

He said that through the first three months of this year, there had been an increase in the number of people who had been laid off, the first lift since the depths of the pandemic shutdowns in early 2020.

“The recent uptick then gives a fair signal that the unemployment rate should move upwards this quarter,” he said.

While the jobless rate has yet to move in response to the Reserve Bank’s interest rate increases, the housing market has deteriorated. There has been a nationwide fall of more than 9 per cent in dwelling values from early last year.

But data from CoreLogic on Monday confirms a second successive monthly increase in values, led by a 1.3 per cent jump in Sydney house values in April.

Commonwealth Bank head of Australian economics Gareth Aird said it now appeared the property market had bottomed. He predicted a 3 per cent rise in home prices this year and a further jump of 5 per cent in 2024.

Aird said stronger than expected population growth, which was contributing to the recent surge in rents, could mean bigger house price increases.

“The risk lies with a stronger increase in national dwelling prices in 2024 given we expect the RBA to be in the midst of an easing cycle,” he said.

Chalmers’ second budget, to be delivered on May 9, is expected to include incentives to encourage housing development and to reduce price pressures on first-time buyers.

If the RBA surprises the market with a quarter of a percentage point increase in the cash rate on Tuesday, it would add almost $100 a month to the repayments on a $600,000 mortgage. The cumulative increase on repayments since the bank started lifting rates would then be more than $1300 a month.

The Reserve Bank board meeting will be the first since the release of the independent review of the RBA, which made a series of recommendations that the bank itself will have to act upon. These include the creation of a chief operating officer position that would be responsible for improving the bank’s culture and improving its succession planning.

It also recommended the bank strengthen its research arm, including the creation of a monetary policy strategy team and increasing links with universities and think tanks.

The government has given in-principle backing to all 51 recommendations.

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