Market update – January 2012
Market update – January 2012
Now that 2012 is upon us, it’s time to reflect on the year that has been and starting thinking forward in to the new year. Overall 2011 was generally a good one for buyers of Sydney residential real estate and not necessarily a bad one for sellers, especially those upgrading to larger homes.
According to the latest available quarterly statistics by Australian Property Monitors (APM)), overall Sydney median house prices fell by 1.6% for the year to September 2011, whilst unit prices recorded modest growth of 0.6% over the same period. For the September quarter however, both houses and units recorded falls, of 1.8% and 0.4% respectively. These figures reflect an overall flat market.
Auction clearance rates hovered around 50-60% throughout most of 2011. Interestingly though, most agents in our main areas of operations (North Shore, Eastern Suburbs, Inner West and Northern Beaches) report that taking into consideration post auction negotiations, the results would have been closer to a 75% success rate a week later.
For these above areas that we mostly operate in, our experience of the performance of the residential property market depended on the price level. Our observations are generally as follows:
Lower end of the market. ($400K to $800K). This market segment experienced strong demand from first home buyers taking advantage of the expiring stamp duty concessions for existing properties, and from investors attracted toincreasing rental returns (and more recently reduced borrowing costs). Overall the market performance was reasonably strong.
Mid market ($800K to $1.5M). Quality properties in this market segment experienced good demand (those in desirable locations, in popular streets and in good condition). Less desirable properties in poor positions withdifficult floor plans or building issues, struggled however, with weaker demand from buyers.
Mid/Upper market ($1.5M to $2.5M). Demand from buyers was generally weak, with prices falling 5-10% in some areas.
Premium market (above $2.5M). The weakest market sector, experiencing the greatest buyer caution. Price falls, some significant were evident.
Several factors influenced the buyer wariness and the softening of prices experienced over 2011. Concerns over the international economy, massive stock market fluctuations, debate over the impact on household finances of the introduction of the carbon tax, and poorer employment figures have all had an impact. The high $A has also largely kept expats out of the market.
So what is in store for 2012?
Assuming the international economic situation continues to stabilise and European country debt issues are resolved, the signs for the Sydney property market are generally positive.
Significantly the Reserve Bank of Australia (RBA) decided to decrease the official cash interest rate by 25 basis points in November and then 25 basis points in December to 4.25%. These were the first interest rate decreases since April 2009, and many economists are expecting further decreases in the short to medium term.
This gave home buyers new confidence at the end of 2011, and is expected to continue over the coming year.
The situation for property investors improved over 2011. To the end of September year in year, Sydney house rents increased by 3.1% and unit prices 4.5%, whilst vacancy rates remain very tight. Investors are seeing more favourable rental returns as a result, and with current international economic uncertainty, we are experiencing the return of investors to the safety of “bricks and mortar”.
We think Sydney is now offering some of the best property buying conditions for quite some time, particularly in the mid to upper market segments.
Some factors contributing to a positive outlook for Sydney property in 2012 are :
- Unemployment remains relatively very low – 5.3% in November 2011 according to the Australian Bureau of Statistics (ABS)
- Interest rates are relatively low in historical terms, and with recent decreases by the RBA the outlook by most economists for interest rates is downwards
- Immigration is still very high to Sydney, and the population increases continue to exceed the amount of new development, putting further pressure of existing housing
- Australia’s economic growth rate was 2.5% for the year to September 2011 according to the ABS, which exceeds most OECD countries, and with continued growth expected
Please contact us for a discussion on how you can take advantage of the current buying opportunities in the Sydney market, or for specific advice on what is achievable with your budget in the various suburbs across Sydney.
Written by Henry Wilkinson of Homesearch Solutions. January 2012
Statement by Glenn Stevens, Governor: Monetary Policy Decision – Interest rate decrease of 25 basis points on 1 November 2011
At its meeting today, the Board decided to lower the cash rate by 25 basis points to 4.5 per cent, effective 2 November 2011.
Recent information is consistent with a moderation in the pace of global growth, though fears of a major downturn have not been borne out so far. The pace of US economic expansion picked up in the September quarter, but is still only moderate and leaves considerable spare capacity. China’s growth has slowed, as policymakers there had intended. Output in Asia has now recovered from the effects of the Japanese earthquake, and domestic demand in the region is generally expanding. Trade performance, however, is starting to see some effects of a significant slowing in economic activity in Europe, where the prospects are for economic weakness to continue. Commodity prices, while still at high levels, have generally declined over recent months.
Financial markets have recovered somewhat from the turmoil of recent months, helped by stronger economic data in the United States and by signs that European governments are making progress in their efforts to deal with the sovereign debt and banking problems. Equity markets have gained ground and the Australian dollar has risen significantly as risk aversion has lessened. But it is likely to be some time yet before concerns about the European situation can definitively be laid to rest and the effects of the recent turmoil on confidence may result in a period of precautionary behaviour by firms and households.
Information about the Australian economy suggests moderate growth overall. The terms of trade have now peaked and will decline somewhat in the near term, but they remain very high. In response, investment in the resources sector is picking up very strongly, with much more to come. Some related service sectors are enjoying better-than-average conditions. In other sectors, cautious behaviour by households and the high exchange rate have had a noticeable dampening effect. The unemployment rate has increased a little over recent months, though it remains close to 5 per cent.
After underlying inflation started to pick up in the first half of the year, recent information suggests the subdued demand conditions and the high exchange rate have contained inflation more recently, notwithstanding continuing sizeable increases in utilities charges. CPI inflation on a year-ended basis remains above the target, due to the effects of weather events last summer, but is now starting to decline as production of key crops recovers. Moreover, with labour market conditions now softer, the likelihood of a significant acceleration in labour costs outside the resources and related sectors in the near term has lessened. Accordingly, the Bank’s current judgement is that inflation is likely to be consistent with the 2–3 per cent target in 2012 and 2013, abstracting from the impact of the carbon pricing scheme.
Financial conditions have been easing somewhat recently, with market interest rates declining a little and competition to lend increasing. But overall conditions have remained tighter than normal, with borrowing rates still a little higher than average, credit growth subdued and asset prices lower than earlier in the year. The exchange rate has been very variable over the past few months, but on the whole has remained at historically high levels.
Over the past year, the Board has maintained a mildly restrictive stance of monetary policy, in view of its concerns about inflation. With overall growth moderate, inflation now likely to be close to target and confidence subdued outside the resources sector, the Board concluded that a more neutral stance of monetary policy would now be consistent with achieving sustainable growth and 2–3 per cent inflation over time.
Source : RBA website http://www.rba.gov.au/media-releases/2011/mr-11-24.html
Statement by Glenn Stevens, Governor: Monetary Policy Decision
At its meeting today, the Board decided to leave the cash rate unchanged at 4.75 per cent.
Conditions in global financial markets have continued to be very unsettled, with uncertainty increasing about both the prospects for resolution of the sovereign debt and banking problems in Europe, and the outlook for global economic growth. While temporary impediments that had contributed to a slowing in growth in some countries over recent months are lessening, recent data suggest a continuing period of soft economic conditions in both Europe and the United States. Moreover, the uncertainty and financial volatility have reduced confidence, which could result in more cautious behaviour by firms and households in major countries.
It will take more time for evidence of any effects of the recent European and US financial turbulence on economic activity in other regions to emerge. Thus far, indications are that economic activity is continuing to expand in China and most of Asia. Nonetheless, recent events have led forecasters to reduce their estimates for global GDP growth, which is now expected to be about average this year and next. Prices for commodities have declined over recent weeks, though in general they remain high.
Australia’s terms of trade are very high, which has increased national income considerably. Investment in the resources sector is picking up very strongly and some related service sectors are enjoying better than average conditions. In other sectors, cautious behaviour by households and the earlier rise in the exchange rate have had a noticeable dampening effect. The impetus from earlier Australian Government spending programs is now also abating, as had been intended. While there remain good reasons to expect solid growth over the medium term, the indications are that the pace of near-term growth is unlikely to be as strong as earlier expected, due both to local and global factors, including the financial turmoil and related effects on business confidence.
Underlying inflation stopped falling and began to increase earlier this year. The Board has been concerned about the prospect of a further pick-up over the period ahead, but over recent months has been weighing the question of whether a period of weaker than expected conditions would contain that pick-up in inflation. Recently revised data show a pick-up to date in the underlying pace of price rises that was less sharp than initially indicated. Moreover, with labour market conditions now a little softer and households more concerned about the possibility of unemployment rising, the likelihood of a significant acceleration in labour costs outside the resources and related sectors is lessening.
Taking into account all the recent information, the path for inflation may now be more consistent with the2–3 per cent target in 2012 and 2013, abstracting from the impact of the carbon pricing scheme. This assessment will be reviewed on receipt of further data on prices ahead of the Board’s next meeting. An improved inflation outlook would increase the scope for monetary policy to provide some support to demand, should that prove necessary.
The Board noted that financial conditions have been easing somewhat, with interest rates for some housing and business loans declining slightly due to increased competition and the fall in some funding costs in financial markets. The exchange rate has also declined from the very high levels of a few months ago. Credit growth remains low, however, and asset prices have declined.
At today’s meeting the Board judged the current cash rate remained appropriate. As always, the Board will continue to assess carefully the evolving outlook for growth and inflation.
Source : Reserve Bank of Australia website, 4 October 2011
Rates unlikely to change while global uncertainty remains: RBA’s Glenn Stevens
The Reserve Bank is unlikely to change interest rates while anxiety and uncertainty remains in global financial markets, RBA governor Glenn Stevens has suggested.
Stevens expects that global anxieties are not only having an impact on consumer spending behaviour but could help ease current inflationary pressures.
In a speech made today in Perth titled “Still Interesting Times”, he also stressed that people should not jump to conclusions about the current sovereign debt issues in Europe being comparable with the 2008 GFC.
Stevens says during periods of “sudden increases in anxiety within international financial markets are moments when, if at all possible, it is good to be in a position to be able to maintain steady settings”.
“In the recent few meetings, the board has judged it prudent to sit still, even though we saw data on prices that were, on their face, concerning. To be in that position of course requires timely decisions to have been made in earlier periods.”
Looking ahead at future cash rate decision, Stevens says the task for the board would be to assess what bearing recent information and international and local events will have on the medium-term outlook for demand and inflation.
Stevens says the current environment presents “no shortage of challenges” though he stresses that it should not be assumed that it is necessarily the GFC crisis of 2008 all over again.
“It is reasonable to conclude, at this point, that the outlook for global growth is not as strong as it looked three months ago. Forecasters are generally revising down global growth estimates for 2011 and 2012, mainly as a result of weaker outcomes for the major countries,” he says.
Inflation remains a concern, with Stevens highlighting that while growth seems to be weaker than expected at the end of last year, underlying inflation seems to be higher.
“A key question is whether that is just the vagaries of statistical noise and lags, or whether it is telling us that the combinations of growth and inflation available to us in the short term are less attractive than they seemed a few years ago. If the latter, the spotlight will come back on to supply-side issues.”
Stevens addresses the question of its inflation targets, which have guided the bank in the past on adjusting inflation rates in less globally volatile times.
“Sometimes people ask whether a higher target for inflation might not be better, particularly when inflation is looking like it will rise and the bank is running a setting of monetary policy designed to resist that.
“The answer ultimately hinges on how prepared we would be to accept the things that would go with higher inflation. Higher average interest rates would be among them – there is no reason that savers, any more than wage earners, would be prepared simply to accept an erosion of their financial position.”
Furthermore, he says whatever structural challenges the economy faces will still have to be faced at higher inflation rates.
“Higher inflation wouldn’t make those issues go away, nor make them any easier to cope with (as we know from our own history when inflation was high and structural change still had to occur). We would simply waste more real resources as everyone sought to protect themselves from the higher inflation.”
Stevens points out that credit growth has slowed a bit further and asset prices have tended to decline.
“These factors, along with ongoing evidence that underlying inflation had turned up, were incorporated in the bank’s outlook as published early last month,” he says.
Explaining the 2% to 3% inflation target setting, Stevens says the bank has “a fair bit of history now” dating back to the early 1990s and he acknowledges the work of former RBA governor Ian Macfarlane in determining the current monetary policy framework.
“We arrived at this framework after a long search – the ‘search for stability’ set out in detail by Ian Macfarlane in his ABC Boyer Lectures in 2006,” Stevens says.
At a time when statements made by the RBA are being heavily scrutinised (theAustralian Financial Review runs line-by-line analysis in its editions), Stevens acknowledges this scrutiny and details the research the bank puts into place in putting its monetary policy framework into place.
“The bank carries out a great deal of detailed statistical work, tracking several thousand individual data series. It conducts extensive liaison with businesses and other organisations, usually speaking in detail to as many as 100 contacts each month. It produces voluminous published analysis of these data,” he says.
Stevens stresses the unprecedented set of complex forces facing the Australian economy.
“There is an epochal change occurring, and Australians are also feeling that. It is overwhelmingly positive for us in net terms, even if our tendency to dwell on the downside is more prominently on display at present.
“The future is uncertain.”
RBA leaves rates unchanged – 6 September 2011
Statement by Glenn Stevens, Governor: Monetary Policy Decision
At its meeting today, the Board decided to leave the cash rate unchanged at 4.75 per cent.
Conditions in global financial markets have been very unsettled over recent weeks, as participants have confronted uncertainty about both the resolution of sovereign debt problems and the prospects for economic growth in Europe and the United States. As a result, the outlook for the global economy is less clear than it was earlier in the year. Some temporary impediments that had contributed to a slowing in growth in some countries over recent months, such as the supply-chain disruptions from the Japanese earthquake and the dampening effects of rising commodity prices, are lessening. But the uncertainty and financial volatility is reducing confidence and may result in more cautious behaviour by firms and households in major countries. A number of forecasters have scaled back their global growth estimates over the past couple of months.
At this stage, little evidence is available to gauge any effects of the European and US problems on other regions. Prices for key Australian commodities have remained very high thus far, with growth in China continuing to look solid. As a result, Australia’s terms of trade are now at very high levels and national income has been growing strongly. Investment in the resources sector is picking up very strongly and some related service sectors are enjoying better than average conditions. In other sectors, cautious behaviour by households and the high level of the exchange rate are having a noticeable dampening effect. The impetus from earlier Australian Government spending programs is now also abating, as had been intended. Overall, the near-term growth outlook continues to look somewhat weaker than was expected a few months ago. Beyond the near term, growth is still likely to be at trend or higher, unless the world economic outlook continues to deteriorate.
Growth in employment has been moderate this year and the unemployment rate has been little changed, near 5 per cent, for some time now. Reports of skills shortages remain confined to the resources and related sectors. After the significant decline in 2009, growth in wages has returned to rates seen prior to the downturn, though productivity growth has been weak.
Year-ended CPI inflation should start to decline towards the end of the year, as temporary weather-related effects reverse. But measures of underlying inflation have been increasing this year, after declining for the previous two years. While they have, to date, remained consistent with the 2–3 per cent target on a year-ended basis, the Board remains concerned about the medium-term outlook for inflation. A key question will be the extent to which softer global and domestic growth will work, in due course, to contain inflation.
Most financial indicators suggest that monetary policy has been exerting a degree of restraint. Credit growth has declined over recent months and is very subdued by historical standards, even with evidence of greater willingness to lend. Most asset prices, including housing prices, have also softened. The exchange rate is high. Each of these variables is affected by other factors as well, but together they point to financial conditions being tighter than normal.
At today’s meeting, the Board judged that it was prudent to maintain the current stance of monetary policy. In future meetings, the Board will continue to assess carefully the evolving outlook for growth and inflation.
RBA interest rates decision – 2 August 2011
Statement by Glenn Stevens, Governor: Monetary Policy Decision
At its meeting today, the Board decided to leave the cash rate unchanged at 4.75 per cent.
The global economy is continuing its expansion, but the pace of growth slowed in the June quarter. The supply-chain disruptions from the Japanese earthquake and the dampening effects of high commodity prices on income and spending in major countries both contributed to the slowing. It is still not clear how persistent this slower growth will be. The supply-chain disruptions are now gradually abating and commodity prices have softened of late, though they generally remain high. In China most indications suggest only a mild slowdown so far.
The central scenario for the world economy over the next couple of years envisaged by most forecasters remains one of growth below the pace of 2010, but at or above long-term averages. Downside risks have increased, however, as concerns have grown over the outlook for the public finances of both Europe and the United States.
Australia’s terms of trade are now at very high levels and national income has been growing strongly. Investment in the resources sector is picking up very strongly and some related service sectors are enjoying better than average conditions. But in other sectors, cautious behaviour by households and the high level of the exchange rate are having a noticeable dampening effect. The impetus from earlier Australian Government spending programs is now also abating, as had been intended.
The resumption of coal production continues, but a full recovery of flood-affected production now looks unlikely before early next year. Precautionary behaviour by households also looks likely to keep some areas of demand weaker in the near term than earlier expected. Overall, growth in real GDP through 2011 is now likely to be at about trend. Over the medium term, overall growth is still likely to be at trend or higher, unless the world economy deteriorates noticeably.
Growth in employment has moderated and the unemployment rate has been little changed, near 5 per cent, for some time now. Reports of skills shortages remain confined, at this point, to the resources and related sectors. After the significant decline in 2009, growth in wages has returned to rates seen prior to the downturn, though productivity growth remains weak.
Year-ended CPI inflation has been high, affected by the extreme weather events earlier in the year. As these effects reverse over the next couple of quarters, CPI inflation should decline. But measures that give a better indication of the trend in inflation have begun to rise over the past six months, after declining for the previous two years. While they have, to date, remained consistent with the 2–3 per cent target on a year-ended basis, the Board remains concerned about the medium-term outlook for inflation.
It is appropriate under such circumstances for monetary policy to exert a degree of restraint. Most financial indicators suggest that it has been doing so, as a result of the Board’s decisions last year. Credit growth has declined over recent months and is very subdued by historical standards, even with evidence of greater willingness to lend. Most asset prices, including housing prices, have also softened over recent months. The exchange rate is high. Each of these variables is affected by other factors as well, but together they point to financial conditions being tighter than normal.
At today’s meeting, the Board considered whether the recent information warranted further policy tightening. On balance, the Board judged that it was prudent to maintain the current setting of monetary policy, particularly in view of the acute sense of uncertainty in global financial markets over recent weeks. In future meetings, the Board will continue to assess carefully the evolving outlook for growth and inflation.
Source : Reserve Bank of Australia website
Slowing inflation may stay RBA hand for interest rates until 2011
THE Reserve Bank is expected to keep interest rates on hold for at least a few months after much better than expected inflation data.
A slowing in the pace of underlying inflation sent the Australian dollar tumbling as investors scaled back the chance of a rate increase as early as next Tuesday.
Analysts said the key June-quarter report on consumer prices had put to rest speculation the RBA would lift official rates at its Tuesday board meeting.
While there was less than a one-in-three chance the RBA would lift rates by a quarter of a percentage point to 4.75 per cent, investors had worried about a pick-up in core inflation after second-quarter export prices had a record rise.
But the pace of core annual inflation, which strips out volatile consumer price moves, slowed to within the RBA’s 2-3 per cent target range for the first time in three years.
Macquarie interest rate strategist Rory Robertson said the softer inflation outlook meant the RBA would hold off raising rates from the current 4.5 per cent.
“The RBA will remain on hold for at least the next three months and probably into 2011,” Mr Robertson said in a research note after the data was released.
“If you were thinking the RBA might make this federal election campaign interesting, think again.”
Westpac chief economist Bill Evans agreed the RBA would keep its powder dry at the August 3 board meeting and “most likely for the remainder of 2010”.
“Now, with rates on hold for the foreseeable future, consumer confidence, business confidence, housing and most likely the labour market will be boosted,” Mr Evans said in a note.
“Interest rates are still only at neutral levels, so given this scenario, it is now much more likely that the tightening cycle will resume sometime in 2011.
“By then, the Chinese economy will have restored its upward momentum, labour markets will be uncomfortably tight, and housing is likely to be staging a resurgence.
“Even economies like the US and Europe will have had another six to 12 months to work through their chronic imbalances.”
The RBA has raised rates six times since October in an effort to stabilise an economy benefiting from the fast-growing emerging Asian nations, particularly China.
The pace of core, or underlying inflation, slowed to 0.5 per cent in the June quarter, compared with 0.8 per cent in the previous three-month period, data showed.
“This number comes as an extraordinary surprise,” Mr Evans said.
The headline Consumer Price Index rose 0.6 per cent on-quarter and 3.1 per cent over the year, the Australian Bureau of Statistics said today. The pace of CPI was slower than market forecasts of 1 per cent on-quarter and 3.4 per cent over the year.
The main drivers of the “downside shock” in the inflation report, Mr Evans said, were price falls in the recreation category as well as financial and insurance services.
Royal Bank of Scotland chief economist Kieran Davies said: “The major economies around the world are also forecast to remain steady (on official interest rates).
“The Reserve Bank can extend its pause until later this year and make its judgment with more information about both the world economy and the labour market.
“This means that rates stay higher than the rest of the world for longer, but wider cash-rate differentials are more an issue for later.”
Goldman Sachs economist David Colosimo said the investment bank still forecast a 25bp tightening of monetary policy in November this year, ahead of 75bp in 2011.
“This outcome strengthens our view that the RBA will leave rates unchanged at that time, given that the global backdrop remains uncertain and the previously booming Australian housing market appears to be cooling,” he said.
“From a medium-term perspective, however, we believe inflation pressures remain.”
Source : Scott Murdoch. The Australian Newspaper – 28 July 2010
Reserve Bank keeps interest rates on hold
Statement by Glenn Stevens, Governor: Monetary Policy Decision
1 June 2010
At its meeting today, the Board decided to leave the cash rate unchanged at 4.5 per cent.
Since the Board last met, concerns about sovereign creditworthiness in several European countries have been a focus of financial markets. Investors have generally displayed a good deal more caution. As a result, equity prices have fallen and long-term government bond rates have declined outside of the countries most affected by the sovereign concerns. The Australian dollar fell sharply as part of this adjustment. Commodity prices have also softened, though those important for Australia remain at very high levels.
European policymakers have responded by assembling a large package to provide financing for the relevant countries for a period of time, stabilise bond markets and provide liquidity. They have also committed to action to bring budget deficits down and stabilise debt over time.
July 7 – Reserve Bank holds interest rates at 3%
Source – Press release from reserve bank 7 july 2009
STATEMENT BY GLENN STEVENS, GOVERNOR
MONETARY POLICY
At its meeting today, the Board decided to leave the cash rate unchanged at 3.0 per cent.
The global economy is stabilising, after a sharp contraction in demand during the December and March quarters. Downside risks to the outlook have diminished, with conditions in global financial markets improving this year and action to strengthen balance sheets of key financial institutions under way. Growth in China has strengthened considerably, which is having an impact on other economies in the region, including Australia.
Nonetheless, credit conditions remain tight and the effects of economic weakness on asset quality present a challenge. There is tentative evidence that the US economy is approaching a turning point, but conditions in Europe are still weakening. While the considerable economic policy stimulus in train around the world should support recovery, it is likely to be slow at first. For it to be durable, continued progress in restoring balance sheets is essential.
Economic conditions in Australia have to date not been as weak as expected a few months ago. But output has been sluggish and capacity utilisation has fallen back to about average levels, with some further decline likely over the rest of the year. Weaker demand for labour is leading to lower growth in labour costs. These conditions should see inflation continue to abate over the period ahead.
A pick-up in housing credit demand suggests stronger dwelling activity is likely later in the year. House prices are tending to rise. Business borrowing, on the other hand, has been declining, as companies postpone investment plans and seek to reduce leverage in an environment of tighter lending standards. Large firms have had good access to equity capital, which is assisting in strengthening their financial structures.
Monetary policy has been eased significantly. Market and mortgage rates are at very low levels by historical standards, despite recent small increases. Business loan rates are below average. The effects of these changes will still be coming through for some time yet. Fiscal measures are also providing considerable support for demand.
The Board’s current view is that the outlook for inflation allows some scope for further easing of monetary policy, if needed. In assessing how it might use that scope, the Board will continue to monitor how economic and financial conditions unfold and how they impinge on prospects for a sustainable recovery in economic activity.
RBA Interest rate cut on 7 April 2009 to 3%
MEDIA RELEASENo: 2009-06 |
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STATEMENT BY GLENN STEVENS, GOVERNOR
MONETARY POLICY
At its meeting today, the Board decided to lower the cash rate by 25 basis points to 3.0 per cent, effective 8 April 2009.
Recent information from abroad indicates that the contraction in the global economy continued during the first few months of this year, and most assessments of the near?term outlook have been further marked down. Considerable economic policy stimulus is in train in most countries, the full effects of which are not yet discernible, but which should help contain the downturn over the rest of the year. There are tentative signs of stabilisation in several countries, including China, though it is too early yet to judge how durable these will prove to be.
Conditions in global financial markets have continued to improve gradually, helped by progress towards a resolution of banking system difficulties in the United States and other major countries. Sentiment remains fragile, however, and the contraction in economic activity is affecting asset quality of financial institutions.
The Australian economy is contracting, though by less than those of its trading partners. Capacity utilisation has fallen from its peak, and will decline further over the rest of the year. With demand for labour weakening, growth in labour costs will probably also fall. Hence inflation over the medium term is likely to be lower than it has been over the past two years. Demand for credit is weak overall, though credit for owner?occupied housing is picking up.
There has already been a major change in both monetary and fiscal policy in Australia. Market and mortgage rates are at very low levels by historical standards and business loan rates are below recent averages, reducing debt?servicing burdens considerably. Nonetheless, the Board judged that there was scope for a further modest adjustment to the cash rate. The stance of monetary policy, together with the substantial fiscal initiatives, will provide significant support to domestic demand over the period ahead.
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