A long-stalled Campbelltown development site is back in play, with new plans for 139 apartments set to supersede a mixed-use scheme approved almost a decade ago but never built.

The new proposal for 28 Cordeaux Street would deliver 116 market and 23 affordable apartments in a part 14-storey building, bringing a substantial new project into a Campbelltown market where new apartment supply remains limited.

Plans have been filed over the 3,092 sqm corner site at Moore-Oxley Street, around 600 metres from Campbelltown Railway Station and the city-centre retail core.

The site already carries a mixed-use residential approval dating to 2016. Doroch Architects has now been engaged on a larger replacement scheme, which is progressing as a State Significant Development Application following a Housing Delivery Authority determination in August 2025.

The apartment mix comprises 39 one-bedroom, 72 two-bedroom and 28 three-bedroom residences. Two-bedroom apartments make up just over half of the project, while three-bedroom homes account for 20 per cent.

<img alt="First look: New 139-apartment plans revive long-stalled Campbelltown city centre site" data-entity-type="file" data-entity-uuid="136dd5b9-3791-4da6-9e31-76f533f5b4de" src="https://s3.ap-southeast-2.amazonaws.com/www.urban.com.au/s3fs-public/inline-images/Campbelltown%20da2.png?VersionId=LgOSy9nwf5u.MGswBBwaGGxuX8QpHSl_" />

Of the 139 apartments, 23 will be delivered as affordable housing under the in-fill affordable housing provisions of the Housing SEPP. The affordable component represents 15 per cent of the residential gross floor area and will be managed by a registered Community Housing Provider.

Doroch has sought to break the scale of the building into two distinct elements, with a masonry podium of around four storeys establishing the street edge before the residential tower steps back above.

The corner position has shaped that approach. Cordeaux Street faces toward the commercial and civic centre, while Moore-Oxley Street leads into the lower-scale residential neighbourhood to the south, and the design verification report describes the site as "bridging the commercial core to the north and established residential areas to the south."

The podium will be expressed predominantly in face brick, while the upper levels shift to brushed and grooved concrete cladding with darker metal detailing. Recessed sections, deep balcony edges and landscaping break down the upper form, with an approximately 11.8-metre setback to the northern boundary addressing the adjoining St Peters Anglican School.

<img alt="First look: New 139-apartment plans revive long-stalled Campbelltown city centre site" data-entity-type="file" data-entity-uuid="c8b3d2d3-c561-4bfc-a5d9-a68c0c10dac1" src="https://s3.ap-southeast-2.amazonaws.com/www.urban.com.au/s3fs-public/inline-images/Campbelltown%20da1.png?VersionId=AeAEyJU02Gk2k5noUj2StziCvdQ7fW4B" />

Campbelltown has been starved of new residential developments in the last decade.

The only other notable development set to come to market this year is ALAND's Queen Square, a mixed-use precinct on over two hectares that will comprise apartments above a vibrant ground-level retail and hospitality dining precinct.

Joel Robinson

First look: New 139-apartment plans revive long-stalled Campbelltown city centre site

First Look: Sherlock Construction pitches apartments for low-rise Deception Bay

Queensland builder-developer MAYD has revealed the first look at its major North Kirra beachfront development, lodging amended plans that reduce the number of apartments and increase the proportion of larger residences.

The project is planned across a substantial 4,742 sqm amalgamated site spanning seven lots at <a href="https://www.apartments.com.au/new-apartments/2-6-pacific-parade-bilinga-qld-4225">2-6 Pacific Parade</a> and 27-33 Golden Four Drive in Bilin​ga, directly opposite Nor​th Kirra Beach.

<a href="https://www.apartments.com.au/developers/mayd-group">MAYD</a> secured the site for $32.5 million in 2025, in what was one of the Gold Coast's largest property transactions of the year.

The development will be delivered across two stages, with the first stage carrying an estimated gross realisation value of around $360 million.

The latest amendments seek to reduce the overall apartment count and shift the project further toward the owner-occupier market, with larger residences designed for buyers wanting considerably more space than traditionally offered in a beachfront apartment.

The residential mix will include townhomes, oversized two-bedroom apartments, substantial three-bedroom residences and four-bedroom homes.

MAYD has appointed Cera Stribley to lead the architecture and interiors, with the Melbourne-based design practice drawing on the beachfront setting through a series of ocean-facing terraces and heavily landscaped balconies.

Strong horizontal forms and curved balconies will define the exterior, with subtropical landscaping integrated throughout the building to soften the built form and increase the connection between the residences and the beachfront.

The project will also include an extensive collection of resident wellness and lifestyle facilities, continuing the broader shift across the Gold Coast's luxury apartment market toward larger homes supported by resort-style amenity.

<img alt="MAYD" data-entity-type="file" data-entity-uuid="d1bcbb05-e659-4b47-8bd4-1e595315e2ad" src="https://s3.ap-southeast-2.amazonaws.com/www.urban.com.au/s3fs-public/inline-images/Screenshot%202026-08-27%20at%202.05.03%E2%80%AFPM.png?VersionId=jj0XEud1X1DuLt7_KyElhjMdZGOXmLHP" />

MAYD Founder Todd Mould said North Kirra was increasingly appealing to buyers attracted to the more established, lower-density character of the southern Gold Coast.

"North Kirra presents one of the most compelling luxury residential opportunities currently emerging in Australia, combining absolute beachfront with the character and authenticity that buyers are increasingly seeking, and the same sense of tight-knit community that defined Burleigh and Currumbin perhaps 10 or 15 years ago," Mould said.

"With Gold Coast Airport on its doorstep, it also offers a level of accessibility that broadens its appeal across almost every market demographic."

The project comes as the southern Gold Coast continues to attract an increasing share of high-end apartment development and buyer activity.

Kirra in particular has emerged as one of the region's more tightly held beachfront markets, with its relatively low-density character, established surf and hospitality scene and proximity to Gold Coast Airport differentiating it from the higher-density markets further north.

Mould said those characteristics had informed the approach MAYD and Cera Stribley had taken to the project.

"We've worked closely with Cera Stribley to create a vision that is deeply connected to its surroundings," he said.

"Inspired by the coastline itself, the architecture has been shaped around space, privacy and resort-style living, creating a collection of homes that reflects the next generation of luxury on the southern Gold Coast."

MOTIV Managing Director Carly Cottam, who has been appointed to market the project, said buyer attention had continued to move south along the Gold Coast.

"Purchasers who may once have defaulted to Broadbeach, Main Beach or Surfers Paradise are increasingly recognising the value of a genuine beachfront location that offers lower density, strong amenity and a more established sense of community," Cottam said.

"Kirra has a powerful combination of growing demand and genuine scarcity. Beachfront supply is inherently constrained, the area remains relatively low density, and buyers are increasingly placing a premium on locations that feel established, uncrowded and authentic rather than heavily developed."

Cottam said the proximity to Gold Coast Airport was also proving increasingly important for interstate and second-home buyers.

"Being minutes from Gold Coast Airport makes it particularly compelling for interstate buyers, frequent travellers and second-home purchasers who can access an authentic coastal lifestyle almost immediately after stepping off a flight."

The acquisition takes MAYD's active development portfolio to more than $500 million, with the North Kirra project representing one of its largest undertakings to date.

MAYD is targeting an early 2027 launch.

First look at MAYD's North Kirra mixed-use precinct

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Castle Hill, the longtime hub of the Hills District, has been one of the major beneficiaries of Sydney's Metro expansion, with improved connectivity helping drive continued population growth, development and buyer demand across the Hills District.

But despite that growth, the suburb has seen relatively few major new apartment projects brought to market over the past 18 months.

Hills District developer Reve Group is looking to fill that gap with <a href="https://www.apartments.com.au/new-apartments/nova-r-ve-castle-hill-2-garthowen-crescent-castle-hill-nsw-2154">Nova Rêve</a>, a major new mixed-use precinct on the corner of Garthowen Crescent and Old Castle Hill Road, a short walk from Castle Hill Metro Station and Castle Towers.

[smartcode_project:default project_id=152737 project_image_fid=377679]

The project will comprise three residential towers alongside a hotel, restaurants, cafes and a skybar, more than 1,600 sqm of ground-floor retail and almost an acre of landscaped gardens.

It represents the largest project undertaken by Reve Group, the development arm of the Kassis family, which has been building across the Hills District for more than 30 years through Kassis Homes.

[smartcode_project:default project_id=152737 project_image_fid=377675]

Nova Rêve also represents a significant step up from the family's first apartment development, Grand Rêve, which was delivered nearby on Garthowen Crescent.

Grand Rêve introduced larger, house-like apartment layouts and premium inclusions including Wolf and Sub-Zero appliances to the Castle Hill market.

Nova Rêve takes that approach to a precinct scale, combining the residential component with hospitality, retail and substantial public and resident landscaping.

[smartcode_project:default project_id=152737 project_image_fid=377685]

Reve Group Managing Director Sam Kassis said the project reflected the family's three decades of building in the Hills, which has evolved from trophy homes on quarter-acre blocks to larger-scale apartment development.

"Grand Rêve was our first apartment project here and it showed us what this pocket of Castle Hill could be. Nova Rêve is the refinement of that idea: not just apartments, but a place the whole suburb can use," Kassis said.

A key part of that approach is the hotel, which has been designed to operate as an amenity for the wider Castle Hill community rather than solely hotel guests.

It will include restaurants, cafes, skybars and all-day dining, alongside conference and event facilities catering to business functions, community groups and private events.

At ground level, more than 1,600 sqm of shops and cafes will open onto the surrounding streets and landscaped areas.

Almost an acre of gardens designed by Land and Form Studios will run through the precinct, incorporating pathways, seating, barbecue areas and children's play spaces.

[smartcode_project:default project_id=152737 project_image_fid=377680]

Reve Group's Romio Georges said creating an active ground plane had been central to the planning of Nova Rêve.

"There are gardens with pathways, barbecues, seating and play areas, shops and cafes opening onto the street, and a hotel with restaurants and a skybar that anyone in Castle Hill can walk into," Georges said.

The project's elevated position on one of Sydney's highest ridgelines will also provide apartments with outlooks toward the Sydney skyline, surrounding parkland and the Blue Mountains.

More than 80 per cent of the apartments will occupy corner positions, with Turner responsible for both the architecture and interiors.

&nbsp;

[smartcode_project_cta:default project_id=152737]

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Nova Rêve arrives as Reve Group bets on Castle Hill's next growth phase

A collection of just 25 large-format apartments and penthouses overlooking Goodwin Park is entering the Coolangatta market, with <a href="https://www.apartments.com.au/new-apartments/marea-residences-coolangatta-27-27a-dixon-street-coolangatta-qld-4225">Maréa Residences</a> combining a low-density, residential-only approach with uninterrupted park and Pacific Ocean outlooks.

Located at 27 Dixon Street, Maréa comprises three and four-bedroom residences alongside a limited number of dual-level penthouses, with the project positioned between Goodwin Park and <a href="https://www.apartments.com.au/developments/coolangatta-qld-4225">Coolangatta</a>’s coastal precinct.

Construction has commenced, with completion currently estimated for late 2027. Three-bedroom residences are priced from $1.8 million.

[smartcode_project:default project_id=150999 project_image_fid=374005]

The project has been designed around its northern outlook across the park, with the building’s architecture, landscaping and material palette intended to establish a connection with the neighbouring green space. The residences have been configured to maximise natural light and views across Goodwin Park towards the ocean.

Inside, the material palette incorporates timber, stone and brushed brass, complemented by curved detailing and ambient lighting. Kitchens and bathrooms carry the same natural material approach, while residences also include basement parking, storage and lift access.

Maréa’s penthouses are arranged over two levels and include private pools, adding another layer to the project’s focus on larger-format apartment living. Across the development, residences are configured with three or four bedrooms rather than the broader mix of smaller apartment types commonly found in larger projects.

[smartcode_project:default project_id=150999 project_image_fid=374010]

Resident amenity is concentrated at rooftop level, where landscaped entertaining terraces and pools take advantage of elevated views across Coolangatta and the Pacific Ocean.

The project has so far been particularly well received by local owner-occupiers and downsizers, according to Urban Activation Property Sales and Marketing Director Matt George, with the residential-only format, construction quality and northern park outlook among the features resonating with purchasers.

“The uninterrupted northern aspect overlooking Goodwin Park has been a key point of difference, with buyers attracted to the sense of serenity and open space the park provides, while still enjoying easy access to the ocean and being within walking distance of the lifestyle and amenities Coolangatta has to offer,” George said.

[smartcode_project:default project_id=150999 project_image_fid=374002]

“The combination of high-quality construction, a residential-only building, park outlook and proximity to the beach has resonated strongly with the local downsizer market.”

The Dixon Street address is within walking distance of Coolangatta Beach and the broader southern Gold Coast coastline, including the surf breaks at Snapper Rocks and Kirra. Coolangatta’s cafés, restaurants and retail are nearby, while Gold Coast Airport is also within close proximity.

[smartcode_project_cta:default project_id=150999]

Maréa Residences brings parkside apartments to Coolangatta

Interest Rates

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Following a recent series of scandals, Australian economists and industry experts are calling for banks to improve their public image to win back consumers, while a cash rate rise is not as close as initially expected, according to new research by finder.com.au - the site that compares virtually everything.  The economists and experts shared their views in the latest finder.com.au RBA Survey, the largest of its kind in Australia, will all 33 panellists unanimous in forecasting the cash rate will hold at 1.5% at tomorrow’s (5 September 2017) Reserve Bank board meeting.
The last change to the cash rate was a 0.25% decrease in August 2016.  The panel were also largely in agreement that banks should improve their public image, with 79% of those surveyed on this topic (19) saying banks are not doing enough to win the trust of consumers.  “The banks have themselves acknowledged that there is a trust disconnect with consumers. Rate movements out of synch with the RBA exacerbate the problem, especially when reporting season comes along and billion dollar profits are the norm,” said panellist Leanne Pilkington of Laing+Simmons.  When asked about the next cash rate move, the majority of experts (80%, 24) are forecasting the next cash rate move to be up, with most of that group (60%, 13), not expecting a rise until the second half of 2018.  Graham Cooke, Insights Manager at finder.com.au, said while a rate rise is looking likely, this is expected to happen later than first thought.  “There’s been no cash rate movement over the last 12 months, however we have seen the estimated date of the next rise push further into 2018, potentially giving some Aussie borrowers breathing space for longer,” he said. That said, one in three experts expect a potential rise earlier than this, with two economists – Dr Andrew Wilson of Domain Group and Noel Whittaker of QUT – flagging a pre-Christmas rise in November 2017.  Recent cuts to savings rates by various banks are adding to the speculation, said Mr Cooke.  “If we were to see a rise in November, this would not be a good Christmas present for homeowners.
“Some banks, including Westpac, RaboDirect, ME Bank and ING, have recently reduced their savings rate out of cycle, which may indicate they foresee an impending rise,” he said.  A report released last week from The Committee for Economic Development of Australia suggested housing affordability will be a long-term issue in Australia.
The report’s proposals that relaxing council planning restrictions and replacing stamp duty with a land tax went down well, with 80% of experts surveyed by finder.com.au approving of both recommendations. Less popular were the proposal to change tenancy laws to favour long-term tenants (68% approval) and increasing capital gains tax, which 58% of experts disagreed with. With a cash rate rise on the cards, homeowner are being urged to take a closer look at their mortgage rates.
One in two of finder.com.au’s expert panel recommend homeowners check their rates annually, with one in four recommending a more regular quarterly assessment.  “It’s not a matter of if, but when – rates are set to rise. So now is a great time to lock in a low rate on your home loan.
“We’re seeing many sub-4% rates so if you’re paying more than this, you’re paying too much. Look for a rate with a three in front of it to know you’re getting a good deal,” said Mr Cooke.  Here’s what our experts had to say: Jordan Eliseo, ABC Bullion (Hold): "Latest economic data released, including todays CAPEX results, will give the board confidence that the economy is stabilising and set to continue on its trajectory of steady if not spectacular growth. As a result, they'll be confident that they have the appropriate monetary policy in place for now." Tim Nelson, AGL Energy (Hold): "[The] latest RBA statement on monetary policy states: 'The Bank’s forecasts are little changed from those published in the May Statement on Monetary Policy." Shane Oliver, AMP Capital (Hold): "The RBA and rates are stuck between a rock and hard place - solid business conditions and labour market indicators along with the RBA's expectations for strong growth argue against a rate cut but subpar growth at present, risks around consumer spending, low wages growth and inflation and the rise in the $A argue against a rate hike." Alison Booth, ANU (Hold): "The available data do not suggest that any change  is warranted at this stage." John Hewson, ANU (Hold): "Hard to read [the] economy." Darryl Gobbett, Baillieu Holst Ltd (Hold): "Continued concerns at strength of Australian economic recovery and weak wages and inflation outlook in conjunction with financial system issues of increasing household debt." Peter Munckton, Bank of Queensland (Hold): "Interest rates are at the correct level." Richard Robinson, BIS Oxford Economics (Hold):"Inflationary and wage pressures are weak. RBA would prefer to have a lower dollar, so there is a rationale to cut rates. But RBA fears heating up residential property markets, so it will hold rates." Paul Dales, Capital Economics (Hold): "Interest rates are stuck in the mud, with financial stability concerns preventing more cuts and the weakness of economy/inflation preventing hikes." Craig James, CommSec (Hold): "Interest rates are at a level that will gradually see inflation rise to within the 2-3% target zone." Dr Andrew Wilson, Domain Group (Hold): "Reserve Bank is maintaining an optimistic medium-term view of the economy despite recent negatives of high dollar, sharply falling home building approvals and subdued wages growth." Saul Eslake, Economist (Hold): "Inflation still below target; unemployment and underemployment below where the RBA wants them to be; currency starting to get into "uncomfortable" territory; but (on the other hand) monetary policy already highly accommodative (and RBA worries about financial stability risks associated with easing further)." Mark Brimble, Griffith University (Hold): "The economy remains fragile and in need of some support, however other concerns will keep the RBA on the bench for some time in relation to cash rates." Peter Haller, Heritage Bank (Hold): "The state of the economy means that the RBA is content to leave rates on hold for now." Shane Garrett, Housing Industry Association (Hold): "There is no pressing need to move rates at this time." Alex Joiner, IFM Investors (Hold): "No economic reason to shift policy, economic growth and inflation do not require tighter policy and downside risks to the economy currently do not present any case for further easing." Michael Witts, ING (Hold): "Still very little reason to move on rates." Leanne Pilkington, Laing+Simmons (Hold): "We think the hold pattern remains appropriate. The reasonably strong Aussie dollar, encouraging employment figures and credible results from the reporting season all point to a steady economy, leaving little impetus to tinker with the cash rate at this time." Nicholas Gruen, Lateral Economics (Hold): "Because it's convinced itself it shouldn't cut more, and it obviously shouldn't raise rates." Mathew Tiller, LJ Hooker (Hold): "Little discernible change to economic indicators over the past month. Price growth across most east coast property market has moderated and listing number have begun to rise in the run up to spring." Michael Yardney, Metropole (Hold): "The RBA can't raise rates as it would stifle our fragile economy and would lead to a higher AU$. Similarly, it can't lower rates as this would fuel the Sydney and Melbourne property markets. So rates are likely to be on hold for a while." Mark Crosby, Monash Business School (Hold): "Aside from political tensions in North Asia nothing to move the RBA in either direction. Weakening of the USD makes the case for imminent rises less compelling, and no reason to cut." Chris Schade, MyState Bank (Hold): "Interest rate settings remain appropriate. Economy is performing a little below trend, inflation remains well contained, and the Aussie dollar is higher than the RBA would like. Holding rates at their current highly accommodative level is appropriate to allow the economy to continue to gain momentum over the coming couple of years." Alan Oster, NAB (Hold): "Still too early to change.  Economy and labour market doing well but house prices still strong - especially Sydney / Melbourne." Jonathan Chancellor, Property Observer (Hold): "The board will be happy to take their hold position into the second year as there's no elevated cause to move one way of the other." Matthew Peter, QIC (Hold): "Lack of wage growth and inflationary pressure combined with weak economic growth could justify a rate cut. However, until the housing market shows sustained signs of slowing, the RBA can't lower rates." Noel Whittaker, QUT (Hold): "I don't think they are ready to lift yet – but they will be thinking about it." Nerida Conisbee, REA Group (Hold): "Economic data continues to be too mixed to move either way." Christie Williams, Smarter Property Investing (Hold): "Our Big 4  financial institutions are at or under APRA's 30% investor home loan limit whilst continuing to grow their home and investor loan books." Brian Parker, Sunsuper (Hold): "Nothing in the data or the RBA's commentary that points to a move." Richard Holden, UNSW (Hold): "Their multiple objectives (inflation, housing prices, AUD, wages growth, gdp) are moving in conflicting directions. Other participants: Bill Evans, Westpac (Hold).
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jonathanchancellor-7SQnKwU6yx

Banks not doing enough to win trust of consumers, say experts

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The Future Fund is dispensing with its government bond holdings and beefing up cash levels in readiness for rising global interest rates, which its chairman Peter Costello says is “just a question of when”.
The sovereign wealth fund reported an annual return of 8.7 per cent that helped lift its assets to $133.5 billion from the initial $60.5 billion contribution 10 years ago.
But its cash weighting of more than $28 billion was once again a focus of attention.
"Markets are trying to adjust and central banks are trying to give them direction so when the adjustment comes it's not a surprise," Costello was cited as saying by The Australian Financial Review.
The fund's chief executive, David Neal, stressed that the fund's outlook had hardly changed over the year and that even though it had a large cash position, the fund in aggregate was taking risks. For instance it had risky positions in property, venture capital and high yield debt.
The fund has about 6 percent invested in property assets.
Recently, Treasurer Scott Morrison cited strong demand for low-yielding government bonds as the reason the Federal government would not draw on the fund’s assets to meet the its unfunded pension liabilities, for at least 10 years.
"We just had our 1000th bond tender earlier this week, [it was] four times oversubscribed," Morrison said at a Bloomberg Event on Thursday.
"Being able to borrow at those rates means we have made the decision not to draw down on the Future Fund – which is earning at 6 to 8 per cent," he said.
"And why would you draw down when it has that cost to your returns, when you can [borrow] at this other level, maintain the Future Fund for another 10 years to ensure your unfunded superannuation liabilities are covered off."
With nearly a decade since the GFC, Costello said central banks would try to return to normal interest rates.
"You don't stay in a state of emergency long after the storm has passed," he said.
Costello said there shouldn't be any surprises that Australians have increased their borrowings in a period of low interest rates.
"When central banks supported by governments reduce interest rates they are asking people to borrow and Australians have responded by borrowing," he said.
“But when they raise interest rates they are asking people to cut borrowing and when they start [that process] asset prices will readjust."
High debt-to-wages ratio has been worrying the RBA.
"Virtually all of our debt is in high risk investments seeking higher returns than a traditional portfolio,” Neal added.
"We have no sovereign bonds in our debt portfolios – they are in specialist investments that are trying to deliver equity like returns and when you put that together you end up with a higher cash weighting."
Neal said sovereign, or government bonds, were "expensive".
"At some point those rates will rise and even if they don't you aren't getting paid much to hold them so instead we have a cash position."
While low interest rates may be putting the Future Fund off sovereign bonds and other assets tied to long term interest rates, governments are benefiting from cheap funding. Australia's 10-year bond rate of 2.7 per cent remains well below the 20-year average of 4.90 per cent, and fell as low as 1.9 per cent in July 2016.
The fund, said it had become more liquid, which Neal said increased its "ability to reposition the portfolio in response to whatever the market throws at us".
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Future Fund bolsters cash levels as it sees global interest rate hikes

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The Reserve Bank of Australia will leave the cash rate at a record low of 1.50 percent when it meets tomorrow.
RateCity.com.au’s analysis of 22 domestic and economic indicators found 17 were pointing to the RBA leaving the cash rate on hold, where it has been since August 2016.
RateCity.com.au money editor Sally Tindall said there was no compelling reason for the Reserve Bank to change monetary policy.
“The RBA would like to hike rates, but the high Australian dollar, combined with low wages growth and low inflation will keep rates grounded in the short-term,” she said.
<a href="https://www.propertyobserver.com.au/images/2017/09/04/image002.png" target="_blank">Click to enlarge</a>
<img src="https://www.urban.com.au/images/2017/09/04/image002.png" alt="">
“The economy is moving steadily rather than spectacularly, so the logical option is for the Board to hold fire until there are major changes in the key economic indicators.
“This means the RBA is currently playing a waiting game.
“They won’t want to move rates until families get some relief from the current cost of living pressures. With little relief in sight, they’re likely to hold off until next year.
“The other complicating factor is that the banks already increased rates in the first half of this year so we’ve actually experienced an unofficial tightening of monetary policy, despite no official change in the cash rate,” said Ms Tindall.
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j.ballantyne1990-6AQqhLzZaK

RBA set to leave cash rate at 1.50 percent

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GUEST OBSERVER
Most of the timely indicators of domestic economic activity suggest that growth is set to pick up pace in coming quarters (we expect year-ended GDP growth of 3.3% over 2017).
Key amongst these indicators are surveyed business conditions, which are around decade highs, and employment growth, which has picked up recently with sufficient momentum to push the unemployment rate lower.
A major driver of these developments has been an improvement in conditions in the mining sector, which has spent a number of years in retreat. Higher commodity prices and the end of the decline in mining investment mean that the resources sector is a tailwind, rather than a headwind for growth (see A commodity prices tailwind, finally, 17 January 2017). The latest manifestation of this has been the strong profits reported by Australia’s miners. The timely economic indicators have also been supported by a bounce-back in activity after poor weather held back Q1 GDP. Retail sales, non-mining investment and coal exports have risen recently. Reflecting this, we revise up our Q2 GDP growth forecast to 0.9% q-o-q (previously 0.5%).
A key question for the RBA remains whether the expected lift in growth will feed through to a pick-up in wages growth and domestic inflation. Weak wages growth has been a factor that has weighed on consumer sentiment and growth in household consumption. We expect wages growth to pick up modestly in the second half of 2017, due to a boost to the minimum wage and the impact that the lift in corporate profitability typically has on wages growth. This should mean that domestic inflation is past its trough, and we see the underlying inflation measures lifting back into the bottom part of the 2-3% target band in coming quarters.
Above trend growth, a modest lift in wages growth and underlying inflation, plus still uncomfortably exuberant Sydney and Melbourne housing markets are, in our view, likely to be sufficient to see the RBA lifting its cash rate in early 2018.
On fixed income strategy, we see potential for more money market risk premium but there is little to fear for the long-end even if the RBA tightens policy next year. 
<a href="https://www.propertyobserver.com.au/images/2017/09/04/Screen%20Shot%202017-09-04%20at%208.28.31%20AM.png" target="_blank">Click to enlarge</a>
<img src="https://www.urban.com.au/images/2017/09/04/Screen%20Shot%202017-09-04%20at%208.28.31%20AM.png" alt="">
Business conditions and the labour market are improving 
Surveyed business conditions have remained around their highest levels for a decade in recent months (Chart 1).
Across industries, this reflects continued positive business conditions for most of the non-mining sectors and a significant improvement in the survey results for mining companies.
The improvement in business conditions is consistent with the recent strong profit reporting season, with the mining companies the stand-out performers in terms of profitability.
The key business surveys also show a pick-up in capacity utilisation. To meet demand, firms are hiring more labour, with growth in employment and hours worked picking up pace in recent months (Chart 2).
There are also signs that non-mining business investment is set to rise, with the ABS Capex survey showing a pick-up in its forward-looking estimates (Chart 3). This fits with our view that business investment will turn positive for the first time in six years in 2018 (Downunder Digest: Australia’s next investment upswing, 21 March 2017).
Timely indicators of activity, such as retail sales and exports, have also lifted in recent months, partly because they were held back by wet weather (including Cyclone Debbie), which weighed on GDP in Q1.
Given an earlier bounce-back than we had expected (we were expecting the bounce-back to be stronger into Q3), we now expect Q2 GDP growth (due out on 6 September) to be 0.9% q-o-q (previously 0.5%).
<a href="https://www.propertyobserver.com.au/images/2017/09/04/Screen%20Shot%202017-09-04%20at%208.29.41%20AM.png" target="_blank">Click to enlarge</a>
<img src="https://www.urban.com.au/images/2017/09/04/Screen%20Shot%202017-09-04%20at%208.29.41%20AM.png" alt="">
However, we now expect a little less growth in Q3 and Q4 and are maintaining our through-the-year forecast for 3.3% y-o-y over 2017 (Chart 4).
The lift in economic activity is also starting to spread to Western Australia, which is the region that had been hardest hit by the end of the mining boom. Jobs growth in Western Australia has picked up to be running at around 1.5% y-o-y, up from falling at that pace 12 months earlier (Chart 5).
<a href="https://www.propertyobserver.com.au/images/2017/09/04/Screen%20Shot%202017-09-04%20at%208.31.04%20AM.png" target="_blank">Click to enlarge</a>
<img src="https://www.urban.com.au/images/2017/09/04/Screen%20Shot%202017-09-04%20at%208.31.04%20AM.png" alt="">
As we pointed out in a recent piece, the improvement in conditions in the mining states, particularly in Western Australia, is a signal that the process of rebalancing growth following the end of the mining boom has almost come to its end (Downunder Digest: States reveal the rebalancing act is almost done, 21 July 2017). For the RBA, this should mean that it may no longer need to maintain its current highly accommodative stance of policy.
Wages growth sluggish but expected to pick up
A key challenge for the RBA is that although growth is expected to pick up and the labour market is tightening, wages growth remains sluggish. The wage price index rose by 1.9% y-o-y in Q2, which is around its slowest pace on record, although it appears to have stabilised in recent quarters (Chart 6).
However, we expect wages growth to edge higher in coming quarters for a number of reasons. First, the minimum wage was lifted by more this year than last year, which should directly add around 0.2-0.3ppts to wages growth from Q3 2017.
<a href="https://www.propertyobserver.com.au/images/2017/09/04/Screen%20Shot%202017-09-04%20at%208.32.12%20AM.png" target="_blank">Click to enlarge</a>
<img src="https://www.urban.com.au/images/2017/09/04/Screen%20Shot%202017-09-04%20at%208.32.12%20AM.png" alt="">
Second, the labour market is tightening, which should provide some support for wages growth. Third, there is a strong positive historical correlation between corporate profits in Australia and wages growth. Typically, when profitability improves, as it has done recently, some of this additional income feeds through to the household sector in the form of wages growth (see Downunder Digest: Show me the money, 20 April 2017).
The AUD has risen but so have commodity prices
Another concern has been that the Australian dollar has risen recently and that this could weigh on growth, by reducing export competitiveness and driving import substitution, and could also weigh on inflation. However, it is important to keep in mind that the increase in the AUD has been accompanied by a pick-up in the prices of Australia’s commodity exports, led by iron ore and coal, and a lift in global growth.
Because of this, the RBA has been reluctant to suggest that the AUD ought to fall. In its public commentary the RBA has, instead noted that ‘an appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast’.
There is clearly considerable uncertainty about what the lift in the AUD could mean for the Australian economy. A pure mechanical model would suggest that a 10% rise in the real trade- weighted AUD index would weigh on export growth to the tune of 4% of exports. However, this assumes all else equal. If the lift in the AUD reflects a pick-up in global growth or commodity 
prices, the rise in the currency may itself be a signal of better growth to come (see Downunder Digest: Trade leads the way, 24 August 2017). Historically, it has often been the case that the first sign that local growth is set to pick up shows up in a higher Australian currency.
RBA Governor Lowe says ‘up rather than down’
At a testimony to a parliamentary committee the RBA Governor, Phil Lowe, noted that the current market pricing implying a greater probability of a rate rise than a reduction was a ‘reasonable assumption’. He stated that it is reasonable to assume that the ‘next rate move will be up rather than down’, but that ‘it’s quite some time away if things play out as we expect’.
That the next move is likely to be up is a view we have had since September 2016 (The RBA Observer: The case for no more cuts is strengthening, 30 September 2016). As we noted last month, the RBA does not give forward guidance. So Governor Lowe’s comments are by no means a promise to deliver but are instead his best current judgement as to what is likely, given the RBA’s forecasts.
We see the first hike as likely to arrive a bit earlier than the market is currently pricing. Our view partly hinges on continued expected concerns about the housing market. Although the RBA has been noting that there are ‘signs that conditions in the Sydney and Melbourne markets had eased somewhat’, the housing price growth in these markets is still running at double-digit rates y-o-y (Chart 8).
<a href="https://www.propertyobserver.com.au/images/2017/09/04/Screen%20Shot%202017-09-04%20at%208.33.08%20AM.png" target="_blank">Click to enlarge</a>
<img src="https://www.urban.com.au/images/2017/09/04/Screen%20Shot%202017-09-04%20at%208.33.08%20AM.png" alt="">
If, as we expect, by early 2018, growth is running at an above trend pace, underlying inflation is back in the 2-3% target band (albeit around the bottom edge of the band) and wages growth is past its trough, the RBA may see little need to maintain its highly accommodative monetary policy stance, particularly given its ongoing concerns about the exuberance in the housing market.
Fixed income: more front-end risk premium
There have been modest signs of a cyclical improvement in the region since we turned bullish on bonds in Q1. Given the RBA’s one-sided guidance – that the next move is likely to be a hike – this argues for more money market risk premium and we see the 2-3Y segment of the swap curve as most vulnerable to re-pricing, having lagged the move higher in the RBA dates.
Fundamentally, it is also worth noting that above-average increases to the minimum wage and fair work awards as well as rising utility prices should add around 0.2ppts to the y-o-y rates of both the wage price index and headline CPI, respectively, in Q3. While the long-term impact is uncertain, such prints should at least embolden those arguing that these gauges have bottomed. 
<a href="https://www.propertyobserver.com.au/images/2017/09/04/Screen%20Shot%202017-09-04%20at%208.34.10%20AM.png" target="_blank">Click to enlarge</a>
<img src="https://www.urban.com.au/images/2017/09/04/Screen%20Shot%202017-09-04%20at%208.34.10%20AM.png" alt=""> 
Yet there is little to fear for long-dated bonds even if central banks tighten policy as our economists expect in Q1 2018, sooner than currently priced. History tells us that yield curves flatten when the RBA hikes and long-end rates often fall (Chart 10). That valuations are not stretched, especially on a cross-market basis, emboldens our view (see AUD &amp; NZD Rates: Little to fear for the long-end, 30 August 2017). 
 <a href="https://www.about.hsbc.com.au/hsbc-in-australia/management-team" target="_blank">PAUL BLOXHAM</a> IS CHIEF ECONOMIST (AUSTRALIA AND NEW ZEALAND) FOR HSBC. 
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jchancellor-FAypfDUnLy

RBA on hold, but expect hikes in 2018: Paul Bloxham

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Westpac is cutting mortgage interest rates by up to 85 basis points and waiving fees on other products in time for the peak property season in spring. 
The country’s second largest mortgage lender, is also cutting rates on some of the higher risk interest-only loans, despite revealing recently that its proportion of such loans was above regulatory benchmarks.
Traditionally, the first weekend of spring sales is the most buoyant period for residential buyers and sellers and other lenders are expected to follow suit with rate cuts and promotional offers.
Most offers by Westpac are for new loans only.
The group, which also includes Bank of Melbourne, St George and BankSA, is reducing interest-only fixed rates across one to five-years terms by up to 40 basis points. The new three-year residential investment fixed rate will be 4.64 per cent, according to The Australian Financial Review. 
Another residential investment loan promotion takes 85 basis points off the existing rate to 4.89 per cent.
New four-year owner occupier interest-only rates will be cut by 35 basis points to 4.79 per cent.
Establishment fees are being waived for loans of more than $150,000 for the new offers but the $100 establishment fee still applies, the AFR said.
Earlier this week, the group introduced measures to tighten lending criteria by increasing scrutiny of borrowers' income in response to regulatory pressures.
Even National Australia Bank is tightening its rules for home loan applicants, with photo IDs and supporting documents in response to more regulatory scrutiny of lending practices by banks.
Competition in the home loan market is heating up ahead of spring property season with new research by the mobile website Mozo revealing 23 lenders have dropped owner occupier rates since July 1. 
The comparison site found the average rate cut is 15 basis points, while a handful of lenders have cut by more than double that, despite the Reserve Bank keeping the official cash rate on hold since August 2016. 
"There is an unusually high level of competition in the home loan market this year,” says Mozo director Kirsty Lamont. 
“Competition from smaller banks and non bank lenders in the sub 4 per cent end of the market is red hot with 66 lenders now offering variable rates below the 4 per cent mark.”
Mozo found the most competitive variable rate in the market for a $300,000 owner occupier loan is 3.44%, which is 120 basis points lower than the average Big 4 bank variable rate.
“The difference between the big banks’ rates and the lowest on the market adds up to $2,496 a year for the average borrower on a $300,000 loan,” says Lamont. 
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Westpac slashes rates on some loans ahead of the spring property season 

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CUA has today launched a new variable rate home loan product.   Australia’s largest credit union CUA is offering the new Advance Variable Home Loan with a competitive interest rate of 3.74% p.a (comparison rate 3.75% p.a.) for eligible new to CUA owner-occupier loans paying principal and interest repayments.
Higher rates will apply for owner-occupier interest-only loans and loans with a construction purpose.   Advance will give borrowers access to features including the flexibility to make unlimited additional repayments without penalty, free redraw of payments in advance, a mortgage offset feature (capped at $50,000) and no upfront loan establishment fee, annual or ongoing account keeping fees.
Advance is available for borrowers taking out a loan of at least $100,000, Australian Broker noted.   CUA head of product and marketing Susan Mason said that Advance is a good move for buyers looking to purchase a home to live in or for borrowers looking to bring their owneroccupier home loan to CUA for a better deal.     “We know that for many of our borrowers, having the flexibility of features like redraw and an offset account are important to managing their budget at different times in their life.
"But for many borrowers, they often compromise on these features in the hunt for a really competitive rate,” Mason said.   “Spring is traditionally a busy time for the market, with more properties for sale and more buyers shopping around."
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CUA credit union unveils 3.74% interest rate

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Teachers Mutual Bank and its subsidiary banks will reduce rates for new owner-occupier, principal and interest fixed rate home loans across all brands, according to Australian Broker.
Australian Broker reports the changes are effective 17 August 2017 for new business only, and entail a reduction in rates for principal and interest loans for customers with an LVR of 80 percent or lower.
"The average interest rate per annum will now sit at 3.89 percent for these customers, with a comparison rate of 4.15 percent p.a." Australian Broker reported.
"New fixed rate home loans on 1, 2, and 3 years will also have an interest rate reduction.
"These rates are now 3.79 percent, 3.84 percent, and 3.99 percent p.a. respectively.
"These changes will apply to new business for all Teachers Mutual Bank brands: Teachers Mutual Bank, UniBank, and Firefighters Mutual Bank."
Mark Middleton, Teachers Mutual Bank head of third party distribution said they want to continue to be a leading choice for customers starting on their home ownership journey.
"We expect these rate reductions will be attractive to potential members who want to be supported by a bank that understands their needs, and will provide high quality member service”, he said.
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Teachers Mutual Bank and subsidiary banks reduce rates for some new loans

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The Reserve Bank Governor’s commentary was similar to the Monetary Policy Statement released a fortnight ago.
However his comments today provided more clarity and reinforced our view that interest rates are likely to remain on hold over the next 12 months.
Interestingly the question and answer time highlighted the pragmatic approach the central bank takes in discussing an array of topical issues.
When prompted by parliamentarians about the discussion in the recent Reserve Bank Board meeting on the neutral cash rate, the Governor highlighted that markets will always react to what is said, but the decision to discuss the neutral cash rate setting at the July Board meeting was made earlier this year.
And the message that the Governor wanted to get across was that “it was a reasonable assumption that the next move in interest rates was up rather than down but it is some time away” and the neutral setting for the economy is lower than where it has been in the past.
The Governor made comments on business investment saying it was being held back by a range of uncertainties such as global politics and some domestic policy settings.
Given the strength in the business conditions, the central bank has “been looking for a strong pick-up in private business investment outside the resources sector. This is taking longer to occur than expected”.
And the RBA believes that this reluctance to commit to significant investment could possibly continue for some time yet.
No doubt the level of commitment by businesses to invest in the economy will be watched very closely by policymakers and be a key metric in the outlook for interest rates.
Interestingly, there was a lot of robust discussion on a variety of issues ranging from the mechanisms to control house prices, the growth of household debt, payments systems, Australia’s infrastructure spending, the benefits of a lower Australian dollar, even the cost of electricity prices, penalty rates and tax reform.
Certainly there is a lot that is occupying policymaker thoughts at present.
Overall the Reserve Bank Governor was more optimistic on the medium term outlook for the Australian economy.
Highlighting that even when it comes to mining investment the pullback is almost complete.
The focus now is to ensure an ongoing lift in non-mining business investment to support medium term growth objectives.
CommSec expects no change to interest rates over next year.
Below are the comments Philip Lowe made in regards to various topics.
On economic assessments, "There has been an improvement in survey-based measures of business conditions and capacity utilisation has increased.
“Employment growth has also picked up and retail spending has been a bit stronger of late. Financial conditions remain favourable, with interest rates remaining low and banks willing to lend”.
“In summary, our central scenario is for GDP to grow at an average of around 3 per cent over the next couple of years.
“This would be better than we have seen for some time.”
On business investments, “For some time we have been looking for a strong pick-up in private business investment outside the resources sector.
“This is taking longer to occur than expected.
“While we do see positive signs in parts of the economy, many firms still show some reluctance to commit to significant investment, often citing a range of uncertainties.
“It is possible that this reluctance will continue for a while yet.
“But it is also possible that the improvement in business conditions that we have seen will give firms the confidence to invest more, after a period of under-investment.
“We have incorporated a middle path into our own forecasts.”
On the household sector, “There is an adjustment going on, with many people getting used to lower growth in their real wages.
“Many now see this as more than just a temporary development, with wage increases of 2 point something per cent now the norm.
“In my view, the underlying drivers of the slower wage growth in Australia are much the same as we are seeing overseas.
“At the same time, the household sector is also dealing with higher levels of debt relative to income.
“Higher electricity prices are also affecting household budgets.
“This all means that consumer spending behaviour is something we continue to watch carefully.”
On economic transitions, “The transition to lower levels of mining investment following the mining investment boom is now almost complete.
“This means that falling levels of mining investment will not be a drag on the economy for much longer.
“Instead, with some large LNG projects reaching completion soon, GDP growth is expected to be boosted by a lift in LNG exports”.
On China, “In China, growth has surprised on the upside a little of late.
“The main challenge there continues to be containing the risks from the build-up of debt, while at the same time keeping growth on a steady path.
“This remains a work in progress.”
When asked about the outlook for wages Philip Lowe replied that he hopes to see the annual wage grow by 3.5% over time, inflation 2.5% and productivity 1%.
He also believes that we should be capable of achieving “3-point-something” annual wage growth.
On wage growth he said, “There is an adjustment going on, with many people getting used to lower growth in their real wages.”
“Signs wages are picking up for some construction and IT jobs due to stronger demand for workers”.
He also stated that it was up to the Government to improve structural things such as tax policy, competition policy and education reform.
On prudential housing measures he stated, “I think we have done enough for the time being.”
He reasonably assumed that the next move in interest rates is up, “but quite some time away,” however the average cash rate in the future will be lower than in the past due to lower real rate.
On the level of household debt Philip Lowe stated, “We are cognisant of the high level of household debt and take it into consideration when deciding on policy.”
In terms of inequality he believes that Australia is doing better than other countries and while the productivity is not growing fantastically, it is not doing bad either.
For prices he says that there are lots of prices in the consumer price index that are weak such as food and clothing.
Energy prices are affecting business investment; household budgets and will affect CPI.
He also commented about full time employment saying that an unemployment rate as somewhere around 5%, but he doesn’t see that happening in the next three years.
The latest comments from the Reserve Bank Governor support the view that interest rate settings will be stable for some time yet.
While Governor Lowe said that had a number of areas are being watched closely, from the strength in Chinese demand, to rising Australian dollar, investment and rising household debt.
There are no signs of imminent action on rates.
Savanth Sebastian is a senior economist for <a href="https://www.commsec.com.au/" target="_blank">CommSec</a>.
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Next move in interest rate is "up": Savanth Sebastian

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GUEST OBSERVER
Approvals by local councils to build new homes rose by 10.9 per cent in June after falling by 5.4 per cent in May. House approvals rose 4 per cent to 13-month highs. 
What does it all mean?
Apartment approvals bounced higher in June, but the long-term trend shows that home builders are now increasingly looking to build free-standing homes or townhouses. The share of new building allocated to townhouses has hit a 7-year high of 14.7 per cent while detached houses now account for 51.1 per cent of building – a 15-month high. Whether local councils are saying no to high rise apartments or whether it is the end- buyer saying no, builders, developers and building material providers will need to carefully watch future trends.
More homes are still being approved for construction by local councils. Some thought that the housing pipeline would be well and truly drying up by now, but that’s certainly not the case. The number of council approvals is actually little-changed on a year ago.
What do the figures show?
Building Approvals:
Dwelling approvals rose by 10.9 per cent in June after falling by 5.4 per cent in May. In trend terms, approvals rose by 0.1 per cent in June – the first rise in four months.
Over the past year 219,284 new homes were approved, down from the record high 242,629 in the year to August 2016.
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House approvals rose by 4.0 per cent in June – the third straight gain and the highest number in 13 months. Meanwhile ‘lumpy’ apartment approvals rose by 20.1 per cent in June after falling by 12.4 per cent in May. Apartment approvals have moved in a dramatic zig-zag fashion for the past five months.
 
Across states/territories: NSW (+24.8 per cent); Victoria (+6.1 per cent); Queensland (+0.1 per cent); South Australia (-20 per cent); Western Australia (+19.6 per cent); Tasmania (-8.3 per cent). Trend terms: Northern Territory (-2.7 per cent); ACT (+5.9 per cent).
 
Western Australian approvals hit 7-month highs in June. NSW approvals rose the most in 11 months.
 
Dwelling approvals in May were down by 2.3 per cent on a year ago in seasonally adjusted terms and were down by 14.9 per cent in trend terms.
 
The value of all commercial and residential building approvals rose by 2.2 per cent in June – the third straight gain. Residential approvals rose by 5.5 per cent with new building up by 5.4 per cent while alterations &amp; additions rose by 6.7 per cent to a 6-month high. Commercial building fell by 2.6 per cent in June after rising 13.5 per cent in the two previous months.
 
What is the importance of the economic data?
 
The Bureau of Statistics' monthly Building Approvals release contains figures on local council approvals to build residential structures such as homes and units as well as commercial premises such as offices and shops. Approval is one of the first stages of the construction ‘pipeline’ and is thus a key leading indicator of future activity. An increase in approvals would point to stronger future activity for construction-related companies.
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What are the implications for interest rates and investors? 
Home building remains healthy – and it’s not just new homes but also renovations, tracking near record highs. At present building isn’t soaring nor slumping, but the Reserve Bank will certainly need to keep housing well and truly in the centre of its radar screen over the coming year. 
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Craig James is the chief economist at <a href="https://www.comsec.com.au/default.aspx">CommSec</a>. 
 
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cjames-5S2v74qSNK

Builders again embrace houses: Craig James

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GUEST OBSERVER
As expected, the Reserve Bank Board decided to leave the cash rate unchanged at 1.5%. 
Of most interest in the Governor’s statement was going to be the commentary around the recently sharply appreciating Australian Dollar. Recall that since the last Board meeting the AUD has appreciated from USD 0.76 (TWI 65) to USD 0.80 (TWI 67.3). Markets were reasonably speculating that the Governor would attempt to “jawbone” the AUD with comments as potentially extreme as “a depreciation is necessary”. That language was used when the AUD was falling between USD 0.80 and USD 0.75  in 2015. 
At the very least there was an expectation that the terminology used by Deputy Governor Debelle in a recent talk: “a lower AUD would be helpful”, would be repeated.
In the event, the Governor took a more realistic approach. The experience of “jawboning” in recent years has been that unless the Bank is prepared to support that sentiment with lower rates, the market tended to ignore it. Consequently, the comment “an appreciating exchange rate would complicate this adjustment” was excluded and it was simply stated that “an appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast”.
That statement is supplemented by; “over the next couple of years, the central forecast is for the economy to grow at an annual rate of around 3 per cent”. That compares with the statement in May that “growth is expected to increase gradually over the next couple of years to a little above 3 per cent”. Note that the Bank will release its revised growth and inflation forecasts on August 4 in its Statement on Monetary Policy. In the May forecasts, when the AUD was USD 0.74, growth in 2018 was forecast at 2 ¾ - 3 ¾ per cent, a mid-point of 3 ¼ per cent.
It now seems likely that this growth forecast will be lowered to 2 ½ - 3 ½ per cent.( mid- point of 3 %) That is still a quarter of a per cent above trend growth but does send a more tentative signal about the Bank’s confidence in the growth outlook.
Caution in the growth outlook is also signalled in other parts of the Governor’s statement with a more uncertain view around consumption “one source of uncertainty for the domestic economy is the outlook for consumption”.  That compared with the commentary in May of “growth in consumption is expected to remain moderate and broadly in line with incomes”. Further supporting a more cautious approach to the growth outlook is the decision to highlight the expected slowdown in residential construction – something that has not been discussed in recent statements.
The other area of considerable interest around the upcoming forecasts is whether as a result of the much higher exchange rate to be used in the forecasts (recall that at the time of the May forecasts the AUD was USD 0.74 and TWI 64), the forecast for underlying inflation which currently stands at 1 ½ - 2 ½ per cent (mid-point of 2 per cent, the bottom of the target zone) will be lowered. That would be a most unfortunate development from the perspective of the Bank’s credibility and is unlikely to happen despite the commentary around “the appreciating exchange rate”.
In previous Board minutes, it has been emphasised that the labour market and the housing market are the key areas of interest for the Bank. (With the recent appreciation of the currency, the AUD must be added to that list).
The commentary around the labour market is still somewhat cautious despite consistently strong employment numbers. That is because concerns around wages growth remain, with the damaging feedback loop from low wages growth to weak consumption and business investment being of paramount concern.
Despite some very recent reports that housing markets particularly in Melbourne may be heating up again, probably supported by generous state government subsidies to first home buyers, the Governor chooses to repeat the commentary in July that “there are some signs that these conditions are starting to ease”.
On the international front, the Bank remains cautious around China. It accepts that growth has “picked up a little” but still highlights the high debt levels presenting medium term risks.
In that regard, the Governor has chanced his arm at forecasting commodity prices by noting “commodity prices have generally risen recently, although Australia’s terms of trade are still expected to decline over the period ahead”. He also sounds a note of confidence that the Federal Reserve will continue raising rates - “Federal Reserve expects to increase rates further”.
Those two points combined imply that the Bank is anticipating a lower Australian Dollar, however it has consistently maintained the methodology of assuming that the current level of the Australian Dollar will hold for the full forecast period, which will now be out to the end of 2019.
Conclusion
Despite the Governor stating “the Bank’s forecasts for the Australian economy are largely unchanged”, it appears clear to us that it will revise down its growth forecast for 2018 from 3 ¼ to 3 per cent in response to the rise in the AUD. That number is still well in excess of our own forecast of 2 ½ per cent. We have arrived at that number despite our underlying assumption that the AUD will fall to USD 0.65 by the end of 2018. If we were forced to use an AUD of USD 0.80, we would  see the need to further lower our growth forecast.
I am a little surprised that the Bank is likely to take this step given generally positive developments around the world economy, the labour market and business confidence since May. It would have been strategically tempting to maintain the 3 ¼ per cent forecast  despite the higher AUD and the accepted forecasted methodology.
This does emphasise how concerned the Bank is likely to have become with the recently stronger Australian Dollar.
Until now, we were clearly of the view that with the expectation that growth would reach 3 ¼ per cent in 2018, the Bank was expecting that rates would need to be increased some time in that year. Whilst aware of that, we maintained our view that rates would remain on hold in 2018 given that as 2018 developed,we expected that the Bank would accept that growth was likely to remain below trend precluding the need to raise rates.
We remain comfortable with our on hold call, and can only conclude from the Governor’s statement that the Bank is not as resigned to a rate hike in 2018 as may have been the case a month ago.
BILL EVANS is chief economist of <a href="https://www.westpac.com.au/" target="_blank">Westpac</a>.
 
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