Another rate cut could increase the risks of a housing bubble, a leading economist says, as new figures show house prices got off to a flying start in 2015.
Rate cut expectations have been growing since last week, after the Reserve Bank of New Zealand abandoned its bias for raising interest rates, triggering speculation that Australia’s central bank would also adopt a more cautious approach.
There’s now a two-in-three chance the Reserve Bank of Australia will slash the cash rate to a new record low of 2.25 per cent on Tuesday, according to market expectations.
Westpac economists are also forecasting a cut on Tuesday. But CommSec chief economist Craig James says a batch of data released on Monday, including house price and inflation figures, had shifted the interest rate debate in favour of the RBA remaining on hold at 2.5 per cent.
Property prices experienced their biggest rise in six months in January, with capital city dwelling values up 1.3 per cent in the month, according to figures from CoreLogic RP Data.
Prices in Sydney were up 1.4 per cent in the month while prices in Melbourne jumped 2.7 per cent. Meanwhile, underlying inflation lifted sharply in January. Excluding volatile prices like petrol, fruit and vegetables, underlying inflation rose 0.7 per cent last month, according to the TD Securities/Melbourne Institute monthly inflation gauge.
“The latest economic data have shifted the balance of risks in favour of rates being left on hold,” Mr James said.
“While global deflationary forces support the case for an easing of domestic monetary conditions, the risk is that another rate cut will lead to unsustainable strength in domestic home prices and contribute to inflationary risks.
“The strength of the housing market will clearly feature at the Reserve Bank board meeting.” Mr James’ sentiments echoed those of CoreLogic RP Data head of research Tim Lawless.
“Lower interest rates could potentially add further fuel to the housing market, particularly the investor segment, which continues to remain strong based on recent data,” Mr Lawless said.
St George senior economist Hans Kunnen said strong house price growth, along with firm retail sales and jobs growth, suggested the RBA would remain on hold throughout 2015.
He said people were ignoring the RBA’s warnings about the potential for house prices to fall.
“Warnings from the RBA that dwelling prices do not always rise appear to be ignored by the property-buying public,” Mr Kunnen said.
The RBA board will announce its interest rate decision at 1430 AEDT on Tuesday. AAP