RBA keeps rate on hold

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July 2018 

It should come as no surprise to many that the Reserve Bank of Australia (RBA) has maintained the official cash rate at 1.50%, in line with the last 22 months. This is the longest length of time that a rate has remained at the same level consistently. An increasing number of economists now predict that we are not likely to see a change in this rate anytime soon; some looking as far as 2020 at the earliest. Financial markets aren’t fully priced for a 25 basis point increase in the cash rate until late 2019.

The bank has taken this decision based on a range of different reasons. Namely, a cooling housing marketing, high levels of household debt, plus low inflation and wage growth rates. "The low level of interest rates is continuing to support the Australian economy," the RBA said in a statement. "Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual."

No change in the rate is expected anytime soon based on the slump in credit growth and housing prices. It is hoped that this will not adversely impact levels of household consumption, but until the RBA can be confident of this, it is highly unlikely that we will see a shift in the cash rate.

"Nationwide measures of housing prices are little changed over the past six months. Conditions in the Sydney and Melbourne housing markets have eased, with prices declining in both markets. Housing credit growth has declined, with investor demand having slowed noticeably," said RBA Governor Philip Lowe.

JP Morgan’s Sally Auld states that "This leaves the RBA at the mercy of global developments, and potentially, very vulnerable to the next global downturn. Were such an event to be realised, it is highly probable that the next move in rates in Australia is down."

Conversely other economists remain optimistic. Saul Eslake from the University of Tasmania believes that inflation should start to move back towards the bank’s target rate of 2 to 3 per cent in early-mid 2019.

For the official RBA article, please visit the Reserve Bank’s website.


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