The Reserve Bank has taken the highly unusual step of revealing it considered pushing up interest rates at its board meeting Tuesday, saying it held off primarily because of “acute uncertainty” over debt problems in Europe and the United States.
The 0.25 point rate hike would have pushed up repayments on a $300,000 mortgage $49 per month and repayments on a $400,000 mortgage $66 per month.
It is believed the board had before it an open recommendation from governor Glenn Stevens, meaning it was able to make a decision at the meeting rather than simply accept or reject a recommendation.
The international situation dominated discussion and a consensus was reached that the outlook was too uncertain to make it safe to increase rates as bank staff believe will soon be necessary.
The statement released by the governor after the meeting expressed “concern” about inflation but noted employment growth was slowing, households were “cautious”, government spending was “abating”, credit growth is weak and house prices were soft.
The Bank believes inflation is somewhat lower than the official figures suggest, giving it more time before acting than market economists appreciate... The latest consumer price index had inflation at 3.6 per cent, beyond the bank’s 2 to 3 per cent target band. Underlying measures of inflation were also high at a quarterly rate of 0.9 per cent. But the Bank believes those measures were distorted by a number of unusual price measurements and puts the true rate of inflation at a more moderate 2.5 to 2.75 per cent.
As the Reserve Bank board met the International Monetary Fund concluded a twelve day tour of Australia and declared a rate hike would soon be needed.
“If the recovery remains on track it is likely there will need to be more monetary policy tightening,” mission chief Ray Brooks told journalists.
The IMF will forecast weak economic growth of just 2 per cent in Australia this year followed by more respectable 3.5 per cent next year.
It believes Australian house prices are 10 to 15 per cent over valued.
Building approval figures released during the Bank board meeting showed building intentions slid a further 3.5 per cent in June - the fifth fall in six months. Approvals are down 20.3 per cent on the start of the year and are at two year lows.
Aaron Gadiel, head of the development lobby group Urban Taskforce said NSW was facing a “clear and present danger” after by far the worst performance in the nation.
“NSW already produces less new housing than any other state or territory per head of
population,” he said. “We’ve now seen three straight months where NSW approvals have trended down by 4 per cent per month.”
Victorian approvals are trending down by 2 per cent a month.
“It’s unequivocally weak,” said Housing Industry Association economist Harley Dale. “Housing starts are running at an annualised 146,000 at best. Underlying demographic demand much higher at 174,000 dwellings per annum.”
Treasurer Wayne Swan said the Bank’s decision to hold off on lifting rates was “welcome relief” for families and businesses whose confidence was sapped by international developments.
“We have had a diet of this broadcast into our economy from both Europe and the United States over the last three or four days, and for months and months. On top of that we’ve had this negative and destructive campaign of talking our economy down by Tony Abbott and his Tea Party Liberals. They’ve got their wrecking ball out smashing confidence.”
“We’ve seen the saving rate tick up. Australians are saving more and spending less.”
Published in today's SMH and Age
. Memo RBA: Spending's shrinking
. Attention Reserve Bank: Inflation is not as bad as it looks
. COLEBATCH: The CPI is not a credible basis for policy action