Poor sentiment forces RBA's hand

A significant drop in consumer confidence has encouraged the Reserve Bank of Australia to leave the official cash rate on hold in June.

This is the tenth consecutive month that the cash rate has been left at the historically low level of 2.5 per cent.

The RBA's decision to leave the cash rate on hold would have failed to surprise borrowers given that consumer sentiment plummeted in May.

The latest Westpac Melbourne Institute Index of Consumer Sentiment fell by 6.8 per cent to 92.9 per cent – the lowest level since August 2011.

The sharp fall in sentiment is indicative of an unfavourable response to the recent Federal Budget.

According to the Index, 59.2 per cent of Australians said they expect their family finances to "worsen" over the coming 12 months as a result of the Budget.

The significant amount of criticism that has been aimed at the Federal Government's Budget could encourage the Reserve Bank to leave the cash rate on hold for the foreseeable future.

In the months leading up to the Federal Budget, many economists had predicted interest rates to rise in the not-too-distant future. However, this may no longer be the case. Instead, the Reserve Bank is likely to leave rates on hold for some time and wait and see what happens to consumer sentiment over the coming months.

In fact, in the minutes of the Reserve Bank's May Board meeting, it was suggested that the current accommodative stance of monetary policy was appropriate for some time yet given the current outlook for the economy and the significant degree of monetary stimulus already in place.

Consumer sentiment aside, all of the other indicators suggest the economy is tracking along quite nicely at the moment, with the unemployment rate sitting at 5.8 per cent for the second consecutive month and dwelling value growth finally showing signs of a slowdown.

Research conducted by RP Data found dwelling values slid slightly backwards over the month of May, with Australia's capital cities recording a monthly fall of 1.9 per cent.

Across most of the individual capital cities, dwelling values were also down over the month, led by Melbourne with a 3.6 per cent reduction in values. Over the past three months capital city dwelling values are up 0.7 per cent, the lowest rolling quarterly rate of dwelling value appreciation since the three months ending June 2013.

If you want to learn more about your home loan options, call Mortgage Choice in Paddington on 07 3369 5620 or email adam.bourke@mortgagechoice.com.au.

Posted in: Interest rates

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