Strong consumer sentiment combined with moderate dwelling value growth has encouraged the Reserve Bank to leave the official cash rate on hold.
At today’s Board meeting, the Reserve Bank decided to leave the official cash rate untouched at the historically low level of 2%.
The decision to leave the cash rate on hold was “largely unsurprising” given that the Board cut the cash rate just last month.
Not enough time has passed for the Reserve Bank to truly understand what impact May’s rate cut will have on the domestic economy.
It will take another month or so before the RBA sees what impact the last rate cut has on employment, inflation, business confidence and sentiment etc. And until such a time as we know what effect the May rate cut has on the economy, there is no reason for the Board to pull the rate lever.
But while the Reserve Bank takes a wait and see approach to rates, preliminary data would suggest the May rate cut combined with the relatively benign Budget are starting to have the intended effect on the domestic economy.
The Westpac Melbourne Institute Index of Consumer Sentiment rose by 6.4% in May to 102.4. This jump in sentiment marks the first time since February that the Index has been above 100 - the point which optimists outnumber pessimists.
Furthermore, new data from Core Logic found property price growth may be starting to moderate, with dwelling values falling 0.9% throughout May.
This is the first month on month fall since November. No doubt the Reserve Bank would be pleased by this result, as the Board has consistently said the rapid growth in dwelling values across some of the capital cities is a worrying trend.
While the Reserve Bank made the decision to leave rates on hold this month, further rate cuts could not be ruled out.
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