Interest rates: Cash rate remains at 2%

At its meeting today, the RBA elected to maintain the cash rate at 2.0% for a fifth consecutive month. Key points raised regarding the decision by the Bank include the following:

  • National growth remains soft as two-paced economy persists
  • Fresh data points towards a strengthening job market as unemployment declines
  • Investors seek refuge in real estate as volatile equities market experiences worst quarter since 2011
  • Portfolio sales volumes for 2015 set to exceed previous years, with over $5.5 billion of portfolio sales across office, industrial and retail portfolios
  • Sydney and Melbourne residential markets surges ahead, with annual capital growth of 16.7 per cent and 14.2 per cent respectively.

The RBA resisted renewed pressure to cut the cash rate despite a volatile equities market and crashing commodity prices. Meanwhile, other commodity driven advanced economies like Canada and New Zealand have implemented easing policy to counter declining prices. The RBA, however, in recent sentiments suggested the national unemployment rate had peaked, with signs of a fairer value dollar reviving the non-resource economies. Despite the weakening growth rate, the headline unemployment rate remained stable since it peaked at 6.2 per cent in February.

National economic growth was soft at the end of June, ending at 2 per cent, and down from the 2.5 per cent in the first quarter. Indeed, the two-speed nature of the economy persists as tumbling commodity prices affect the once languid resource states. Conversely, the NSW and Victorian economies continue to pace ahead of the other states. The outperforming growth rate was driven by a surge in population growth, retail trade and new home construction. According to the most recent data released by the ABS, in the last financial year the NSW economy grew by 3.2 per cent whilst the Victorian economy grew by 3.0 per cent. These non-commodity economies are expected to benefit from a fairer value Australian dollar. The dollar is expected to hover around the US70 cents mark for the remaining year, with a bearish outlook in line with a possible interest rate hike in the US and falling commodity prices. At the close of business on Monday the local unit was trading at US70.69, falling almost 20 per cent in the past year. This fairer value dollar is expected to assist the economic recovery, however, the weaker national growth rate has buoyed predictions that the RBA will accelerate monetary easing measures and potentially reduce the cash rate by 50 basis points in the coming 6 months. As a result of this, cash piles will remain relatively strong, and investors will continue to search for means to appease the demand for return.  

Despite the volatility in the equities market, yield hungry investors continue to abandon paltry returning cash instruments. Experiencing its longest decline, the volume of money held in term deposits has fallen for a consecutive 21 months. Notwithstanding this, last quarter, the domestic sharemarket suffered its worst performance since the European debt crisis in 2011. Loses were experienced amongst global peers, with the Dow Jones Industrial, S&P 500, London FTSE 100 and the German DAX losing 8,8, 9 and 13 per cent respectively. With this volatility underpinned by uncertainty stemming from the Chinese economy and anxiety of the US federal rate hike, further loses are anticipated in the fourth quarter. Accordingly, the property sector is expected to receive an additional influx of capital as investors seek refuge in, comparatively safer, return bearing assets. This switch to harder assets was evident with Australia’s largest trading partner, China, as housing sales gathered momentum of the back stimulus driven credit growth. Residential sales revenue in the year to August was 18.7 per cent higher than the same period in 2014. Similarly, in Australia, the residential sector continues to pace ahead demonstrating strong capital growth and construction activity. Reflecting the performance of the wider economy, housing starts in NSW and Victoria continue to do the heavy lifting. In the year to June, housing starts in Victoria and NSW grew by 26 per cent and 20 per cent respectively. Moreover, in the year to September, rpData figures indicate dwelling values in Sydney increased by 16.7 per cent, whilst Melbourne boasted a growth of 14.2 per cent.    

Given the reduction in global earnings growth, organisations have prioritised multi-asset purchases in efforts to reduce the acquisition costs and gain operating efficiencies. In May, Japan Post successfully completed the $6.5 billion takeover of Toll logistics and, more recently, the $1.073 billion GIC industrial portfolio was sold to Singapore’s Ascendas at a yield of 6.1 per cent. Moreover, new benchmarks were set in the office sector with the CIC acquisition of the Investa portfolio for a sharp yield of 5 per cent. Portfolio sales volumes for 2015 are set to exceed previous years, with over $5.5 billion of portfolio sales across office, industrial and retail portfolios.

This demand is expected to persist as offshore groups demonstrate a willingness to pay a premium to inherit instant scale. Not surprisingly, landlords are capitalising on this demand with an increased number of portfolio’s coming to market. JP Morgan, Charter Hall and Growthpoint are currently in the process of bringing industrial portfolios to market. Similarly, Brookfield, Dexus and Charter Hall are set to introduce additional office portfolios to market.

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