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All Eyes on the Housing Market

With uncertainty surrounding the recent federal election subsiding and positive economic news from abroad, several Shadow Board members worry that the loose monetary stance may fuel a housing price bubble. The consensus is to keep the cash rate at its current level of 2.5% but at longer horizons there is a noticeable shift towards the need for higher rates.

The outlook for the US economy has improved slightly although the Federal Reserve would like to see a stronger rebound and thus surprised the markets by delaying the taper of QE3. Uncertainty surrounding the financial conditions of numerous Asian countries persists. The potential for another credit crunch in the region remains but so far economic growth in the region has held up satisfactorily.

For several members of the Shadow Board the main domestic concern lies with the frothy housing market. Rising prices and clearance rates in the major Australian cities are becoming disconnected from their flagging fundamentals. At this stage of the cycle, in which monetary policy is still very accommodative, the RBA would do well to signal to the markets that speculation in the housing market needs be contained.

The Shadow Board’s confidence in keeping the cash rate unchanged has fallen slightly from 65% in September to 62%. The probability attached to the need for a further rate cut now lies at 6%, down from 13%, while a 32% probability is attached to the need for a higher current rate.

This shift towards higher interest rates is also reflected at longer horizons: the probability that rates will need to rise in the next six months has risen 6 percentage points to 47%, while the probability that rates ought to be lower than the current rate has fallen from 32% to 23%. A year out, the shadow board members attach a 58% probability to the need for an increase in the cash rate (up from 52% in September) and a 25% probability to the need for a decrease in the cash rate (down from 31% in September).

Outcome date: 
Tuesday 01 October 2013
Attachment: 
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