The Reserve Bank’s hold decision was widely anticipated, considering core inflation is only just nudging the bottom of the RBA’s target range at 2.0% and the labour market continues to show plenty of spare capacity with an unemployment rate of 5.5%.  Of course, the heat has also come out of the housing market, with CoreLogic today reporting another slip in national home values in April, largely driven by weaker conditions in Sydney and Melbourne.  Nationally, dwelling values have been moving through a controlled slowdown since October last year which has taken a great deal of pressure away from the RBA to lift rates in order to curb exuberance in dwelling investment.  Housing investment has well and truly slowed without any direct intervention from the RBA, highlighted by the fact that credit growth for housing is tracking at an annual growth rate of just 2.5%.  

Macroprudential policies, which have led to mortgage rate premiums and tighter credit policies, provided the heavy lifting needed to slow down investment activity.   While Friday’s Statement on Monetary Policy will provide better guidance around the RBA’s thinking, financial markets are still betting that the cash rate won’t rise until July 2019.  Chances are that official interest rates are likely to be on hold for the foreseeable future, however it remains likely that the next move will be up, not down.  Importantly, mortgage rates could be under some upwards pressure without any change in the cash rate, considering wholesale funding costs are rising as US interest rates push higher.  

Considering the record high levels of household debt and growing number of interest only loans transitioning to principal and interest terms, higher mortgage rates will test the housing markets resilience.