The Reserve Bank of Australia (RBA) has kept the official cash rate on hold at a record low of 1.5% for the eleventh consecutive month, providing little indication of when it will allow rates to rise.
The decision at Tuesday’s board meeting comes ahead of the release of the RBA’s Quarterly Statement on Monetary Policy on Friday, which is expected to explain more of the board’s rationale.
The RBA’s decision to hold the cash rate comes a week after a surprise low inflation reading, with the consumer price index rising a mere 0.2% in the second quarter, missing expectations for a 0.4% increase. This dragged the headline inflation rate for the year to June 30 to 1.9%, which is well below the RBA’s target band of 2-3%.
In his official statement regarding August’s monetary policy decision, Governor Philip Lowe said the recent inflation data was largely what the Reserve Bank had expected. “Both CPI inflation and measures of underlying inflation are running at a little under 2 per cent. Inflation is expected to pick up gradually as the economy strengthens,” he said.
The Reserve Bank did not seem particularly worried about housing prices, saying they were rising briskly in some markets, albeit more slowly. In other markets, housing prices were declining.
“In the eastern capital cities, a considerable additional supply of apartments is scheduled to come on stream over the next couple of years,” Lowe said. “Rent increases remain low in most cities. Investors in residential property are facing higher interest rates. There has also been some tightening of credit conditions following recent supervisory measures to address the risks associated with high and rising levels of household indebtedness. Growth in housing debt has been outpacing the slow growth in household incomes.”
In recent months, mortgage rates have been climbing higher, especially for investors and interest-only loans.
Tim Lawless, head of research at CoreLogic, said higher mortgage rates against a backdrop of high household debt was knocking some of the wind out of the housing market without the Reserve Bank needing to act.
"With headline inflation tracking slightly below the 2 to 3 per cent target range, labour markets tightening and the economy continuing to grow, albeit at a pace below trend, the chances of a rate cut appear to have diminished," he said.
Rate hikes could be some way off as well. “Recent declines in the US dollar and strengthening commodity prices have placed added pressure on the Australian dollar, which may reduce export demand. Financial markets indicate the cash rate won’t rise until late 2018,” Lawless said.
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