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By HaleStewart December 3, 2013 8:06 am
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Potential Housing Bubble Keeps RBA From Lowering Rates

The RBA left the Australian interest rate at 2.5% today. 

Like most central banks, the RBA has an incredibly difficult job in the current environment.  On one hand, Australian growth is slowing as the economy shifts from one dependent on resource exports (mainly to China) to one focusing more on domestic consumption.  Here is a chart of the the annual GDP growth over the last few years:

 

Notice that since the end of the recession, the Australian economy has been growing at an annual rate in the upper 2s.  This is in contrast to a rate of growth betwen 3%-4% during the 2002-2007 expansion.  The primary difference is the decline in the "south-south" trade -- trade fueled by raw material exports to China. 

Cosumer spending has been growing at a decent clip over the last few years as shown in this chart:

Retail sales have been growing a bit below 3% and auto sales have been rising. In addition, unemployment has been rising, though it is certainly not at terrible levels:

Unemployment has ticked up from 5% to 5.7%

However, Australia has an underlying problem, and that is housing prices:

As the chart above shows, Australian housing prices have been increasing in most of the country's larger cities.  Should the RBA lower rates further, they would inadvertanlty be adding fuel to the housing bubble fire.

Like most central banks, the RBA faces an incredibly difficult policy environment.  As the Australian economy changes focus from export dependent to internal growth, expect these challenges to continue.

Hale Stewart is a former bond broker who has been writing about economics and financial markets since 2006 on the Bonddad Blog.  He is also a tax attorney with a domestic and international practice while also forming and managing captive insurance companies for US companies.   You can follow him on twitter at:@captivelawyer

 

 

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