Considering the RBA is running out of conventional monetary policy ammunition, the decision to hold the cash rate at the historic low of 0.75% was widely anticipated. The decision to keep rates on hold was supported by the latest labour market and inflation readings, which saw the national unemployment rate nudge lower, while annual headline inflation edged slightly higher.
Additionally, a rebound in housing values and a rise in buyer activity will hopefully begin to flow through to a gradual improvement in household wealth and spending. While several of the key economic indicators have stabilised, no doubt the RBA will be carefully monitoring other indicators which have continued to lose momentum such as consumer confidence, residential construction activity and retail spending. One of the negative side-effects of such historically low interest rates is that Australian households and businesses are reading through the low rate setting and becoming less confident about their household finances and the outlook for the economy, which is offsetting some of the stimulatory benefits of historically low interest rates.
Although the cash rate has remained on hold, lenders are becoming increasingly competitive, particularly for high quality borrowers – ie those with low debt relative to their incomes and a responsible track record of savings together with expenses that are in line with their incomes. No doubt the lowest mortgage rates since at least the 1950’s and improved access to credit following APRA’s decision to adjust the interest rate serviceability floor are contributing to a rebound in housing market conditions.
While the improved housing market conditions are a positive for broader economic conditions, an increase in speculative activity from property investors or a slip in the quality of lending standards could be the trigger for a new round of macro-prudential policies aimed at maintaining prudent lending standards and keeping a lid on further accrual of housing related debt