Reserve Bank holds rates - again

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As expected by economists, the Reserve Bank of Australia (RBA) has decided to leave its cash rate unchanged at 1.50% amid “underlying weaknesses” in the economy. This marks the 20th straight meeting since the last rate change.

In a statement released Tuesday, the central bank said recent economic data have been consistent with its forecast for GDP growth to average a bit above 3% in 2018 and 2019. It expects inflation to remain low for some time, reflecting low growth in labour costs and strong competition in retailing.

However, CoreLogic head of research Tim Lawless has pointed out that the economy’s “underlying weaknesses” include a 0.4% decline in the Australian housing market in the year to May, weak wages growth (2.1%), high underemployment (8.3%), and core inflation at the lower bound of the RBA target range (2.0%).

According to Lawless, financial markets are not fully pricing in a rate hike until October 2019, despite the latest RBA forecasts suggesting headline inflation will reach 2.25% by the end of this year and unemployment will fall to 5.25%. 

“From a housing market perspective, a stable rate environment is positive. However, there is risk that mortgage rates could rise, regardless of the steady cash rate, due to higher funding costs being faced by lenders overseas,” he said.

CoreLogic figures show that at the end of May, standard variable mortgage rates for owner occupiers remained at their lowest level since 1965, averaging 5.2% and the average discounted rate is tracking even lower at 4.5%. The average three year fixed rate is lower yet again at 4.15%.

Despite low rates, the housing market has slowed since 2015. CoreLogic’s latest estimates indicate the number of settled residential property sales is down 7.7% year on year and transaction numbers are 15.1% lower relative to the 2015 peak. 

“Although interest rates are set to remain on hold for the time being, the availability of housing credit has tightened substantially, which is the primary driver of slower housing market activity and falling home values,” Lawless said.

 

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