The markets probabilities for an interest rate cut have halved from around 72% to 36%. The main driver of this movement has been the Inflation Report for the June quarter, which showed that underlying inflation printed 0.7% for the June quarter compared to "official" forecasts of 0.6% and what we assess as the market's "whisper" forecast of 0.5% (a lower than expected inflation number in New Zealand, which is typically used by markets as a lead indicator for inflation in Australia was behind the optimistic expectations from the market)
A very low inflation number for the June quarter, which prints next week, might embolden the Reserve Bank to restore its easing bias. After all the market is now pricing in a 60% probability of a 25bp rate cut by early 2015 and consumer spending and housing have lost momentum, largely because of the confidence drag from the Federal Budget.
The International Monetary Fund (IMF) has found Australia has the third highest house price-to-income ratio in the world.
The IMF's Global Housing Watch says global house prices have risen consistently for nearly the past two years. The fund says prices are "well above the historical averages" in developed countries including Belgium, Canada, Australia, Norway and Sweden.In addition, the IMF found 14 out of 24 developed economies examined still have above-average house price-to-income ratios, even after the dent in home values in many countries caused by the global financial crisis.
While a recovery in housing markets around the world is welcome, the IMF says it is critical to avoid another unsustainable boom in house prices like the one that preceded the GFC.
In a subsequent speech the Governor strengthened his commentary around the AUD referring to it as "overvalued, and not just by a few cents". He did not go as far as restoring the easing bias but did quote market pricing as indicating that " if a move were to occur over the next several months ... it would be down not up". He also noted that "we still have ammunition on interest rates". Market pricing is now pointing to a 40% probability of a rate cut by year's end.
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