Cut and dried
Unemployment fell back to 5.1 per cent in February on a further
rash of part-time jobs, taking pressure off the February interest rate decision, although major bank economists still see further cuts ahead.
Westpac is still forecasting two further cuts, in April and August, with consumer sentiment in the doldrums, while futures m
arkets are also still pricing further easing, but possibly not for some months to come.
After missing the mandated target for years since 2015, inflation had begun drifting even lower.
Paradoxically, however, inflation may now at least temporarily spike towards the target range as a result of the recent natural disasters, including bushfires and drought.
On the other hand, oil prices have been crunched 14 per cent lower since January 6, so perhaps not.
Meanwhile, the economy has almost completely stalled, with most of the indicators for employment growth (such as job advertisements) weakening sharply, leading Westpac to forecast the unemployment rate rising to 5.6 per cent as soon as next quarter.
Given that inflation is so far below target, and unemployment is expected to rise, another rate cut is priced in to lower the Aussie dollar and stimulate demand.
According to some sections of the financial media the RBA should not ease further, because - you guessed it - Sydney house prices (again).
Leverage and housing
When you look more closely at housing and leverage, though, there are clear reasons why the RBA could still cut.
Firstly, lower rates are actually helping to reduce excess leverage now, as households can extinguish debt faster as well as consume more.
Although lower mortgage rates allowed some households to leverage up, most of the increase in debt to income ratios happened before 2007 when interest rates were much higher, suggesting that other factors were at play, including financial deregulation and the resources boom.
In any event, debt to income ratios are now falling (arguably they haven't increased all that much anyway, net of Australia's burgeoning use of offset facilities).
Faster wages growth would clearly help here, however, hence the importance of targeting full employment and reducing underutilisation from the presently elevated level.
Housing credit growth is running at a 43-year low, underscoring the previous points.
And year-on-year investor credit growth is actually negative, which has never happened before, even in the darkest of recessions.
As for housing prices, the impact of interest rates on house prices isn't nearly as clear as often implied.
Asking prices in Perth are lower than they were a dozen years ago, as they are in Darwin - where asking prices are collapsing at an alarming and accelerating rate.
Apartment prices also haven't increased in a decade in most of Brisbane, or even in some parts of Melbourne.
Stock market froth
I'll concede that there may be some nascent stock market exuberance, but this has little to do with the RBA and everything to do with the US Federal Reserve injecting liquidity again, this time pumping a lazy US$500 billion into the repo market.
Even a casual observer or day trader would have noted how Aussie stock prices tend to mimic those of the US these days, with global returns becoming increasingly correlated with those of the US.
An interest rate cut can always be reversed should the Aussie economy overheat, however remote that possibility may seem.
