The RBA should increase rates today

The RBA should increase interest rates by a further 25bp today.

For most of the month, the data has been pretty finely balanced and I was leaning towards a 'wait-and-see' pause. But two pieces of late arriving data clearly tip the scales towards another rate increase being the appropriate move.

First, the CoreLogic Home Value Index was up 1.1% for June. This is the fourth consecutive monthly increase and should deeply concern the RBA. Both the wealth effect from rising house prices, and the ability to release equity are factors that can keep consumer spending higher for longer. The way our economy is structured, we really need to see house prices falling as part of the equation to bring down consumer demand.

Second, ABS secure housing finance was up a significant 4.8% in May. Coupled with rising housing prices this is a significant concern. As interest rates increase we want to see lending fall. Lending is injecting new money into the economy, generating more demand that will put further upward pressure on prices. Lending increasing is a clear indicator that rates have not gone high enough.  

The housing market is showing pretty significant resilience in the face of higher borrowing costs, and coupled with sticky core inflation and a surprise jump in consumer spending, a rate rise this afternoon is the only responsible option.