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One year of ‘rates on hold’

For the 12th consecutive month, the Reserve Bank has left the cash rate on hold at the historically low setting of 1.5%.

For the 12th consecutive month, the Reserve Bank has left the cash rate on hold at the historically low setting of 1.5%.

Today's decision was labelled “unsurprising” by Australia's leading economists, with the majority suggesting economic events both here and abroad encouraged the Board to leave the cash rate on hold.

In the United States of America, soft inflation forced the US Federal Reserve Board to dampen expectations of another rate increase over the short term.

Similarly, in Australia, a lower than expected inflation result encouraged the Reserve Bank of Australia to take a ‘wait and see approach' to rates.

According to the latest data from the Australian Bureau of Statistics, consumer prices rose just 0.2% throughout the June quarter, pushing the annual rate of inflation down to 1.9%. Not only is this slightly down on the previous reading of 0.5% for the March quarter and 2.1% for the year, but it is below the Reserve Bank's target band range of 2 – 3%.

In addition to a lacklustre inflation result, it is likely that the Reserve Bank's cash rate decision would have been based on the latest developments in the property and lending markets.

Over the last couple of months, many of Australia's lenders have adjusted the pricing across their suite of home loan products. Many continue to lift the price of their interest only loans for both investors and owner occupiers. As such, the spread between principal and interest and interest only pricing is now approximately 80 basis points.

We have also seen some change in the property markets, with areas like Sydney and Melbourne continuing to perform strongly.

According to the latest data from CoreLogic, property values in Sydney and Melbourne rose by 1.4% and 3.1% respectively.

Given these recent developments, it would appear the Reserve Bank's decision to leave the cash rate on hold for another month was the right one.

Looking ahead, some economists, including Mortgage Choice's CEO John Flavell, believe the Reserve Bank could leave the cash rate on hold for a little while yet.

Of course, regardless of what the Reserve Bank chooses to do with the official cash rate over the coming months, one thing is clear: interest rates will remain relatively low for the foreseeable future.

As such, if you are thinking of entering the property market or reviewing your finances, now is a great time to do so.

Posted in: Interest rates

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