WTF is going on with interest rates?

The main news over the week just gone has revolved around the release of the RBA board meeting minutes where the Bank decided to keep official interest rates on hold at 4.75%. The minutes indicated that the Bank discussed Greek debt issues and the volatility across foreign exchange markets, and also noted that the rate of growth in the global economy has slowed in recent months. From a positive economic standpoint, China’s economy (and demand for Australian resources) has continued to grow at a solid pace.

Specifically relating to the Australian economy and the property markets the minutes noted:

‘The multi-speed nature of the Australian economy was clearly evident in recent economic data. The resources sector remained strong, as did some service sectors. However, household cautiousness and the high exchange rate were having a dampening effect on a number of other sectors.’ ‘There had been little growth in nominal wealth over the past year, with housing prices having softened and equity prices lower recently. Members observed that this was in contrast to the experience of much of the past two decades. Housing credit growth had eased further, to its slowest pace in many years, although housing loan approvals had picked up in April and May.’ ‘The housing market remained soft, with nationwide measures of prices recording another small fall in May, although with some differences among cities. Mortgage arrears rates had risen over recent months, although they were still much lower than in most other countries. Arrears rates had increased the most in Western Australia and Queensland, where house prices had been falling after large run-ups in previous years. Members observed that this was similar to the pattern seen in Sydney following the rapid growth in house prices in the early 2000s: households that entered the market around the peak in prices, when lending standards were less stringent, had been more likely later to experience difficulties.’

Overall the commentary was much less bullish about the need to lift interest rates however, they highlighted that the medium term outlook is that economic growth in Australia will be strong (which would likely lead to higher interest rates). Despite this expectation, the RBA felt that they had more time to assess inflationary pressures given the recent weak data flow. As a result the RBA decided to keep official interest rates unchanged.

On the back of the dismal consumer sentiment readings, weak economic data both domestically and globally and the jitters associated with the European debt crisis, Westpac Banking Corporation has broken ranks and is now forecasting the next move from the RBA may be downwards. Westpac are forecasting a 100 basis point fall in interest rates over the next 12 months with the first likely to be around December this year. None of the other major banks have taken the same position, however it seems at the very least interest rates are likely to remain on hold for longer than expected.