Housing caution could hold down interest rates

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Continuing softness in property markets could see interest rates remain on hold for longer than previously expected.

Ongoing caution from households could be a key factor in whether interest rates go up later this year, according to the minutes of the latest Reserve Bank of Australia minutes. The Bank commented that "one area of uncertainty was the behaviour of the household sector, and whether the recent cautiousness of households would continue."

The conditions in the housing market have already played an important role in the Reserve Bank's decision to hold interest rates at 4.75% in May. The committee responsible for setting interest rates had noted that prices in most cities were either flat or down over the past few months, auction clearance rates in Sydney and Melbourne had been at below-average levels and that growth in housing credit had slowed.

"While this partly reflected the effect of the Queensland floods, conditions had softened in most other states as well in the wake of the increase in housing loan interest rates in November," said the minutes. It also noted that the Queensland floods and Cyclone Yasi had had an impact on inflation, with fruit and vegetable prices spiking: however, it also noted that some of these heightened prices were already falling back.

Other key risks for interest rates going forward include global inflationary pressures, overseas national debt concerns, wages pressure and the "significant divergence" between different sectors of the economy. The bank maintained that interest rates are likely to go up at some point: however, should the housing market doldrums persist, it's possible that this hike could happen later rather than sooner.

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