Larry Schlesinger | 17 December 2012

RBA sticks with theme of tentative residential recovery with mining and job worries spurring December rate cut

A tentative recovery in the housing market remains on course with the RBA deciding to cut the cash rate “on balance” due to concerns about the softening job market and to provide support to the non-mining sectors of the economy as the investment peak approaches.

The minutes indicate the inflation outlook provides scope for further rate cuts if needed, with a “small decline in the growth of wages, which was consistent with the softening in the labour market seen over the past year”.

The minutes also suggest an easing bias remains in the minds of RBA board members, with the comment that “forward-looking labour market indicators had generally declined recently, suggesting that employment growth would remain modest in the months ahead”.

A statement about lending rates “now clearly below their medium-term averages” but remaining above the levels reached in 2009 also suggests an easing bias.

As with the November minutes, the December minutes make a number of positive observations about the housing market.

“Forward-looking indicators of residential construction over recent months, including building approvals, continued to point to a modest recovery in that sector over the period ahead,” say the December minutes.

“This was likely to be supported by the pick-up in dwelling prices, sales activity and rental yields over recent months. In addition, loan approvals had moved a little higher since the middle of the year.”

The RBA also notes “tentative signs that dwelling investment was turning up, but the outlook for non-mining investment overall in the year ahead remained subdued”.

The November minutes noted tentative signs of recovery in the property market with the RBA board noting that “new dwelling prices had picked up unexpectedly” and that there had been a “softening in the inflation of rents in the [September] quarter”.

The board also said that there were “tentative indications that housing activity may be reaching a turning point”.

“Over recent months, the number of private residential building approvals had increased, as had dwelling prices, and auction clearance rates in Sydney and Melbourne had continued to rise,” said the RBA board.

The December minutes show that softer labour market conditions and concerns about the outlook for non-resource investment where the primary reasons for the December rate cut.

“At this meeting, the information on labour costs and softening labour market conditions suggested that the inflation outlook still afforded the board some scope to provide additional support to demand.

“Further confirmation that the peak in resource sector investment was near, and that the short-term outlook for non-resource investment remained subdued, indicated that there was a case for the board to provide that support. The Board considered whether to respond to this case in the near term or wait for further information. On balance, members saw merit in reducing the cash rate at this meeting,” say the December minutes.


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