RBA leaves cash rate on hold, as the economy improves and capital growth slows

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As was widely expected, the official cash interest rate remained at 2% after the board of the Reserve Bank elected to make no change at yesterday’s meeting.

The decision means the cash rate has remained on hold since May, and will do so for at least the next two months, with the RBA’s next meeting not until February.

A number of commentators had predicted the central bank would not make a move, preferring to keep any rate cuts up their sleeves for when they are truly needed.

“The Reserve Bank will keep the powder dry until they see very clear signs of the need to stimulate the economy,” John Caelli, markets manager at ME Bank, said.

“Stronger than expected employment data means there is no compelling reason to cut rates,” Caelli said.

Changing conditions across Australia’s real estate markets also likely played a significant role in the RBA’s deliberations.

“Slower housing market conditions were likely a topic of conversation when the Reserve Bank board met today to deliberate on the cash rate setting,” CoreLogic RP Data research head Tim Lawless said.

“[We] reported a 1.5% fall in capital city dwelling values over the month of November and a 0.5% fall over in values over the past three months,” Lawless said.

While Lawless believes the capital growth slowdown would likely be welcomed by the RBA as it allows them more room to move in future months, he also believes the central bank is wary of a severe downturn in growth.

“A less buoyant housing market is likely to provide the Reserve Bank with a greater degree of flexibility in adjusting interest rates without as much risk of over stimulating the housing market as what they have faced over previous months,” he said.

“While the Reserve Bank is likely to welcome a slowdown in the rate of home value appreciation, the overriding objective would be to avoid a significant downturn in the housing market, which would act as a weight on economic growth and potentially impact financial system stability.”

The current low interest rates on offer from many Australian lenders likely alleviate some of the RBA’s concerns though, with Lawless believing they are currently low enough to stimulate activity in the property market.
 

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