The RBA has left the cash rate on hold today at the historically low setting of 1.75% and mortgage rates are likely to remain at their lowest levels since 1968.

In making their decision the RBA is facing conflicting economic trends.  On one hand we have an economy that is growing at just over 3% per annum, low unemployment and a re-accelerating housing market.  On the other hand the RBA is confronted with a core inflation reading which is at a record low as well as the lowest wages growth on record.  While the decision to hold rates was widely expected, the prospect of a further rate cut later this year is still well and truly on the cards.  If the June quarter inflation data, which is out a week before the RBA’s August board meeting, provides another weak reading, the chances of a rate cut in August are high.  The turnaround in the pace of capital gains across the housing sector is likely to be a concern for the RBA.  CoreLogic reported a 1.6% rise in capital city home values last week, following a 1.7% rise in April.  The stronger housing market conditions have been enough to reinflate the trend rate of growth which is something the RBA and the banking sector regulator are likely to be keeping a close eye on.  Strong housing market conditions probably wouldn’t be enough to block a further rate cut, however, if the renewed growth trend continues, there is the potential for a further regulatory response that could cool housing market demand while at the same time allowing monetary policy to stimulate the broader economy.

Read the RBA Media Release here.