Positive movements in both consumer and business sentiment ultimately encouraged the Reserve Bank to leave the official cash rate on hold at its November Board meeting.
According to the latest data from the Westpac Institute of Consumer Sentiment, confidence climbed 4.2% over the month of October. While the bounce back did not quite manage to offset the full drop in sentiment we saw last month, it was still a positive result.
Further, data from National Australia Bank shows there was a partial recovery in business confidence, with financial market volatility and emerging market concerns moderating from the heights of the previous month.
The bounce back in both consumer and business sentiment can be largely attributed to the recent
Government spill and appointment of new Prime Minister Malcolm Turnbull. Moving forward, it is likely that with the Government uncertainties now resolved, business and consumer sentiment will continue to rise.
With this in mind and knowing that consumer and business sentiment has already improved without interference from the Reserve Bank, the Board obviously saw no reason to change the current monetary policy setting.
Moreover, given that most of the major lenders have moved out of cycle with the Reserve Bank in recent weeks, we have seen property demand start to wane ever so slightly.
Recent research conducted by Core Logic found the hottest housing markets in the nation – Sydney and Melbourne – have continued to see an easing in the rate of capital growth.
Over the month of October, dwelling values climbed by just 0.3% and 0.6% in Sydney and Melbourne respectively. Meanwhile, the combined capital cities recorded dwelling value growth of just 0.3% - which is significantly lower than previous months.
The Reserve Bank would be pleased to see that confidence is improving and the property market is cooling without the Board having to interfere with the monetary policy setting.
But while the Reserve Bank has decided to err on the side of caution again this month by leaving the cash rate untouched, that is not to say that the days of further rate cuts are over.
Depending on what happens both locally and abroad over the next few months, we may see the Reserve Bank cut the cash rate once more.
If consumer sentiment, business confidence and economic growth perform sluggishly over the coming months, the Reserve Bank may be forced to act.