RBA Keeps Interest Rates On Hold

Director of Research Tim Lawless comments on today's interest rate decision.

It came as no surprise that the RBA has held the cash rate at 1.5% for its tenth consecutive meeting today. The decision comes on the back of upbeat labour market reports, with unemployment falling to 5.5% since the last meeting and a trend towards more job advertisements. While the jobs market appears to be strengthening, other factors remain subdued, with wages growth tracking along record lows at just 1.9% per annum and core inflation below the target range of 2-3%. Furthermore, a steady cash rate from the RBA against increasingly hawkish sentiments in Europe and the US stand to put downward pressure on the Australian dollar. This would serve as a welcome boost to Australian exports.

Importantly, the housing market is showing signs of slowing, with the CoreLogic Home Value Indices reporting a 0.8% rise in dwelling values over the June quarter; the lowest quarterly growth rate since December 2015. A controlled slowdown in housing market conditions would provide some comfort to policy makers that new macroprudential constraints are working to cool the high rate of capital gains in Sydney and Melbourne.

While the cash rate has remained on hold, the same can’t be said for mortgage rates, which have been edging higher since September last year. Arguably, higher mortgage rates have done much of the heavy lifting in slowing down home value appreciation and cooling investment demand. There is an expectation that mortgage rates will continue to rise, despite a steady cash rate setting, as lenders adjust their credit policies to accommodate the latest round of APRA mandates. If this is the case, we expect investment activity will continue to moderate across the housing market, which could dampen housing market conditions further.

Slower housing market conditions and improvements in employment markets are certainly positive outcomes, however if wages growth and inflation remain subdued we can expect the cash rate to remain on hold over the short term.