A surprisingly weak CPI number means rate cuts are all but a certainty.
Last week, Australian CPI inflation shocked everyone and posted a doughnut – running at 0.0% in the March quarter and just 1.3% over the year.
The RBA’s “trimmed mean” (which takes out lumpy stuff) was running a little better than headline, but at 1.6%, is woefully short of the RBA’s target band of 2-3%.
And what does all that mean?
You can pretty much lock them in now. The RBA had been laying the groundwork for rate cuts in recent months, announcing that it was taking a bit of an easing bias – but this number means they’re going to cut for sure.
If we didn’t have an election in a few weeks, I’d be thinking we’d see them as early as next week. But the RBA prides itself on its political independence, so to my mind, June is more likely… with probably a follow up cut in August.
And the thing to remember here is that this inflation number comes after a very ordinary GDP print a few weeks ago. GDP and inflation are the two biggest dials on the economic dashboard, and both are looking sick.
And embarrassingly for the RBA, both have come in well below the RBA’s forecasts.
Nothing for the RBA to do now but eat humble pie and cut the rates.
And so what does all this mean for the housing market?
Well, it’s definitely a bullish sign for prices, and probably means the current bust is going to wind up sooner than we expected.
That’s not just my view. Take Shane Oliver – one of Australia’s most respected economic commentators – over at AMP.
“An early rate cut does, I think, raise the possibility that the bottom of the cycle will come earlier,” he said on Sunday.
“Historically, if you look at the last two cycles, the 2008 GFC-related slump and subsequent recovery and the 2011-12 slump in house prices and the subsequent recovery, house prices nationwide – and also in Sydney and Melbourne – started to rise four or five months after the first interest rate cut.”
I think that’s right. Expect a June rate cut to start showing up in the October/November buying season.
The other good piece of good news in all of this is that bank funding-costs have eased, which means that the banks should be able to pass more of the official rate cuts on to borrowers.
From Chris Joye at the AFR:
If the RBA cuts interest rates, which financial markets are handicapping as certain by July, Australia’s housing bust will be over. The RBA’s own internal research estimates that a 1 percentage point reduction in the cash rate would boost house prices by 28 per cent, assuming it is fully passed on by banks (and borrowers consider the change permanent)…This column was the first to flag a radical reduction in bank funding costs…
…This has two crucial consequences. First, as we forecast (and some folks tried to dismiss at the time), banks have started cutting interest rates “out of cycle”. NAB, CBA, Westpac, Bank of Queensland, Bendigo and Adelaide Bank, Macquarie and ME have all slashed fixed-rate home loan costs by substantial margins.
A second ramification is that the RBA should be able to bank on close to full pass-through of its own target cash rate changes, especially considering the contemporary political constraints on gouging.
The funding pressures are still there, so I don’t think we’ll get complete pass-through, but we should see the majority of it.
That’s a good thing for markets, and with a couple of rate cuts in the pipe-line, the outlook for property prices is quite sunny.
The outlook for an economy that’s underperforming on inflation and GDP though… well, that’s another story.