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Improving business sentiment gives RBA incentive for rate hold

Business sentiment is on the up in the wake of the Federal Budget, giving the Reserve Bank reason to leave the official cash rate on hold.

Business sentiment is on the up in the wake of the Federal Budget, giving the Reserve Bank reason to leave the official cash rate on hold.

During the May Budget, Treasurer Joe Hockey unveiled several tax incentives for small to medium sized businesses.

These tax benefits seem to have hit the mark with small businesses, with new data from National Australia Bank showing business conditions and confidence have risen to new highs in recent months. 

Better yet, it would seem it is not just small and medium sized businesses that are enjoying a renewed sense of optimism, with the data showing positive momentum is broadening across all sectors and businesses. Confidence is now positive for all industries outside of the mining sector, which is something the Reserve Bank would be acutely aware of.

In recent months, the Reserve Bank has made it clear that they will keep a close eye on industry as the mining sector continues to lose steam.

The happier and more confident Australia's non-mining sectors seem, the better the Australian economy will be.

Of course, business sentiment isn't the only measure that influenced the Reserve Bank's decision today.

The Board is also acutely aware of what is happening in the property market and would, at present, be reluctant to drop the cash rate further lest it encourage more buyers into the market.

Recent data would suggest the Australian property market is quite hot at the moment. Certain capital cities, like Sydney and Melbourne, are enjoying significant property value growth as the demand for property (as a result of the low rate environment) continues to swell.

Research conducted by Core Logic shows property prices climbed 2.8% over the month of July, meaning values have now soared by 11.1% over the past 12 months.

Melbourne and Sydney were largely responsible for the growth in property values over the month of July, with the capital cities recording 4.9% and 3.3% growth respectively.

 This data clearly showcases how much demand there is at present for properties across the two capital cities. With rates low, more and more buyers – especially investors – are looking to snap up a property.

So hot is the demand, especially from investors, that the Australian Prudential Regulation Authority has put a cap on investment lending growth, which has forced many of Australia's lenders to make some sweeping changes to their pricing and policy.

Since the beginning of May, many of Australia's lenders have made some significant changes to their investment lending policy and pricing.

Changes include rate increases on investment lending products, the reduction of maximum loan to value ratios, the removal of negative gearing add backs for loan servicing and the introduction of higher assessment rates.

With so many lenders actively trying to curb their level of investment lending growth, the Reserve Bank would be careful not to incite further property investment demand by lowering rates.

But while the Reserve Bank saw good reason to leave the cash rate untouched at its Board meeting, future rate cuts cannot be ruled out.

The Reserve Bank will continue to keep a close eye on the domestic economy moving forward and won't hesitate to cut rates again should the need arise. 

Posted in: Interest rates

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