RBA warns on Ukraine uncertainty, holds rates despite expected growth

The economy is set to outstrip its pre-pandemic size with new figures expected to reveal a strong recovery over the December quarter with the Reserve Bank resisting pressure to lift official interest rates even as Australians take on record size mortgages.

Economists are expecting a strong rebound in the December quarter national accounts even with the impact of the Omicron outbreak in major cities.

RBA governor Philip Lowe says inflation has picked up more quickly than the bank expected, but remains lower than in many other countries.Credit: Nicholas Rider

NAB economists are tipping the economy expanded by 3.5 per cent in the quarter, ANZ experts are forecasting a 3.6 per cent result, while Commonwealth Bank analysts believe it will show growth of 3.7 per cent. A 2 per cent expansion would be enough to reverse contraction in the previous quarter.

Despite the strong expectations, the RBA kept rates on hold at a record low 0.1 per cent at its March meeting.

EY chief economist Jo Masters said interest rate movements were directly tied to the strength of wages growth.

“Given the importance of wages to the inflation outlook, the bank is clearly watching a range of indicators beyond the wage price index. This means the income measure of GDP will be of particular interest. We’ll be closely watching wages, salaries and improvements in productivity,” she said.

While RBA governor Philip Lowe conceded inflation had picked up, he said it was too early to conclude it was within the bank’s inflation target and for how long the recent lift would persist.

But ratings agency Fitch, in a survey of the world’s 20 largest economies that includes Australia, said in a new analysis that the lift in global inflation “has been widespread and persistent and has shown few signs of having peaked”.

“With producer price inflation rates continuing to rise there are few signs yet in the data of inflation peaking and starting to decline,” the agency said.

The average loan for an established house in NSW hit a fresh record high of $831,300 in January. It has risen by $238,100 or 40.1 per cent since February 2020, just ahead of the shutdown of the Australian economy to stop the spread of the coronavirus.

In Victoria, the average loan climbed to a record $675,700, lifting $147,200 or 27.9 per cent since February 2020. Average loans are also at record levels in the ACT, South Australia and Western Australia.

CoreLogic data shows house prices in Sydney and Melbourne were flat in February. The rapid cooling of the housing market is in part due to rising mortgage rates, affordability pressures and the withdrawal of stimulus measures introduced to help keep the economy afloat during the pandemic.

NAB is forecasting falls in property values in 2023 as mortgage rates rise, with the possibility of mild declines in 2022.

Dr Lowe said housing prices had risen strongly during the pandemic but the rate of increase had eased in some cities.

“With interest rates at historically low levels, it is important that lending standards are maintained and that borrowers have adequate buffers,” Dr Lowe said.

Official interest rates have been on hold since they were cut to record lows in November 2020 in the midst of the coronavirus pandemic. Economists expect rates to start rising gradually over the year.

Dr Lowe said the Australian economy remained resilient with a strong labour market. Spending was picking up following the Omicron outbreak, with a solid pipeline of construction work and more business investment.

However, while the key measure of wages growth had started to pick up, the RBA said this had only recovered to relatively low pre-pandemic levels.

“Inflation has picked up more quickly than the RBA had expected, but remains lower than in many other countries,” Dr Lowe said. The length of time it took to fix supply chain problems, which have been pushing up prices, was an “important source of uncertainty” regarding the inflation outlook, as were developments in global energy markets.

New property investor housing loans increased 6.1 per cent in January to a record high of $11 billion after 15 consecutive months of growth, Australian Bureau of Statistics data shows. Investor loan commitments increased 9.8 per cent in NSW and 11.1 per cent in Victoria.

New loan commitments for all homes increased 2.6 per cent to a record $33.7 billion, with owner-occupier loans up 1 per cent. However, first-home buyer loan commitments fell 6.9 per cent over the month.

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