Citibank has come out today forecasting an end to rate cuts, and rate increases from this time next year, due to the recent acceleration of house prices:
“In Australia, we foresee policy stability from the RBA, which is now hamstrung by rising house prices and a rising AUD,” the bank’s economists argue in a note.
Citi forecasts the official cash rate to stay at 2.5 per cent until the third quarter of 2014 when it will rise to 2.75 per cent.
Without a cut in the cash rate or a fall in the dollar it may be difficult for the non-mining parts of the Australian economy to take off as mining investment falls.
Our view is that the next move in rates is still likely to be down. The fact remains that Australia faces the biggest fall in business investment in 75 years and rising unemployment as the mining capex boom unwinds. The Australian dollar also remains far too high, requiring further rate cuts to reduce Australia’s interest rate differential and attractiveness to foreign investors.
The conundrum of rising house prices and falling mining investment does highlight the need for the RBA/APRA to implement macro-prudential curbs on high risk mortgage lending. This way, the RBA can place downward pressure on the currency via lower interest rates without the risk of blowing-up house prices and household debt levels.
What are Australia’s authorities waiting for?
