No shock move from RBA

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Australia’s official cash interest rate remains unchanged for the second consecutive month after the Reserve Bank of Australia elected to leave it at 1.75% at today’s board meeting.

The RBA’s decision to leave the cash rate on hold is unlikely to surprise many, with the result of today’s board meeting having been correctly predicted by a number of respected economists and financial commentators.

While there had been some speculation that the economic upheaval caused by last month’s Brexit decision could prompt another rate cut from the RBA, Mortgage Choice chief executive officer John Flavell said that had more likely pushed the central bank to announce no move.

“England’s decision to leave the European Union combined with ongoing uncertainty around Australia’s next government provided the Board with the incentive they needed to leave the cash rate untouched at 1.75%,” Flavell said.

“I believe the Board will wait to see what impact these recent events have on consumer sentiment and the broader Australian economy before making any changes to the official cash rate,” he said.

Tim Lawless, research head at CoreLogic, also said global economic conditions likely played a role in today’s decision; however conditions closer to home would have also weighed heavily on the decision making process.

“From a housing market perspective there has recently been renewed heat in the Sydney and Melbourne markets where, according to the CoreLogic Home Value Index, the trend rate of growth has bounced higher over the past three months,” Lawless said.

“The reversal in what was previously a moderating trend in housing market conditions was likely to have been a concern to the RBA, however CoreLogic's June data showed a slower pace of capital gains compared with April and May which may indicate the recent surge in dwelling value appreciation will be sort lived,” he said.

While the RBA was likely reluctant to do anything at today’s board meeting that would further fuel house price growth, Lawless said they could soon be given little choice as impending inflation figures could back the central bank into a corner.

“June quarter inflation data will be available late this month, providing a timely read on consumer prices prior to the August RBA meeting.  It is likely that the inflation figures will come in well below the RBA target range of 2-3%.  If that is the case, there is a high likelihood that interest rates will move lower next month,” he said.

“The challenge for policy makers and regulators will be to ensure lower mortgage rates don’t refuel a higher rate of growth in the Sydney and Melbourne housing markets where affordability is already stretched and rental yields are pushing to new record lows each month.”
 

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