Inflation in Australia has been high over the past year in an environment of limited spare capacity and earlier strong growth in demand. In these circumstances, the Board has been seeking to restrain demand in order to reduce inflation over time.
As a result of increases in the cash rate last year and early this year, additional rises in market interest rates and tougher credit standards, financial conditions have been quite tight. Some further tightening has occurred over the past couple of months. Conditions in international financial markets remain difficult, with heightened concerns over credit persisting.
The evidence is that the tight financial conditions, in conjunction with other factors including higher fuel costs and lower asset values, have exerted the needed restraint on demand. Indicators of household spending have recorded subdued outcomes over recent months, and credit expansion to both households and businesses has slowed. Surveys suggest a softening in business activity and growth in production has slowed. Indicators of capacity utilisation, while still high, are declining and there have also been some signs of an easing in labour market conditions.
The rise in Australia's terms of trade that has occurred is working in the opposite direction, adding substantially to national income and ability to spend. Fixed investment spending by businesses continues to be very strong. At the same time, high prices of oil and a range of other commodities have added to global inflationary risks. They are also dampening growth in a number of countries.
Given the opposing forces at work, considerable uncertainty has surrounded the outlook for demand and inflation. On balance, however, it is looking more likely that household demand will remain subdued and overall economic growth slow over the period ahead. Inflation is likely to remain relatively high in the short term, with the CPI affected by the high global oil prices in mid year and other increases in raw materials prices. But looking further ahead, the outlook for demand suggests that inflation in both CPI and underlying terms is likely to decline over time, provided wages growth remains contained. The Bank's forecast remains that inflation will fall below 3 per cent during 2010.
Weighing up the available domestic and international information, the Board judged that there was now scope for monetary policy to become less restrictive. The Board will continue to assess prospects for demand and inflation over the period ahead, and set monetary policy as needed to bring inflation back to the 2-3 per cent target over time. Read More
The total value of housing finance commitments ($18.175b) rose by 0.6% on June. Read More
Read MoreHousing Finance July 2008Source: ABS Cat No 5609.0On a seasonally adjusted basis the national value of housing loan commitments (owner occupation) in July was $12.474 billion, down by 0.1% on June.
On a state basis, the respective statistics were: NSW $3.971 billion (-1.4%), Victoria, $2.911b (-1.7%), Qld, $2.544b(-1.7%), SA, $0.841b (+0.4%), WA ,$1.585b +0.8%), Tas, $170m (+1.2%), NT, $92m(+9.5%), ACT, $168m (-5.6%).
| For many home buyers this week's interest rate cut was the first they had ever experienced -- and it would have been an exhilarating feeling even if it meant only $60 monthly on a $350,000 mortgage. |
Whether that, and the sniff of more rate cuts, will bring back buyers in large numbers remains to be seen.
Certainly, it's still a buyers market, particularly for first-home buyers.
In Melbourne, for example, there has been a price correction this year -- in a few areas of up to 20 per cent, but generally between 5 and 10 per cent, according to valuer Herron Todd White's September market overview. HTW stresses that the 20 per cent fall is fairly rare, and it doesn't mean the value of every property in Melbourne is down by that much.
Opinions on where values are heading are always mixed.
The latest index from property researcher RP Data/Rismark shows Melbourne values down on average less than 1 per cent in the past three months, but on an annual basis they have still grown -- houses by 5.6 per cent and units by 8.6 per cent.
It also notes that yields in Melbourne, although lower than the national average, are showing month-on-month improvements.
If yields are increasing, it has to be because prices and rents are adjusting.