International troubles force RBA to leave rates on hold

July 07, 2015
Herman Esterhuizen

Greece’s decision to reject the terms of an international bailout has sent shockwaves across the globe.

Following the overwhelming ‘no’ vote at the country’s recent referendum, the Australian share market and dollar both plummeted.

In just 48 hours, the Australian dollar had hits its lowest level since 2009.

As such, the Reserve Bank was forced to take a wait and see approach towards rates at its July Board meeting.

According to RBA governor Glenn Stevens, it is important for the Reserve Bank to see how international problems play out before making any hasty changes to the Australian cash rate.

Of course, it wasn’t just Greece’s referendum and subsequent ‘no’ vote that forced the Reserve Bank to leave its powder dry.

Strong property price growth in Sydney and Melbourne also encouraged the RBA to err on the side of caution and leave the cash rate on hold at 2% for the second consecutive month.

According to recent research conducted by RP Data, property values climbed by 2.8% in Sydney and 2.9% in Melbourne throughout the month of June.

What makes this growth more impressive is that it comes at a time when many of Australia’s lenders have started to tighten their investment lending policies.

In the last few weeks, many of Australia’s lenders have significantly overhauled their investment lending policies in a bid to curb their investor lending growth.

While it was widely expected that these changes would serve to take the heat out of the investor market and thus help to cool property price growth in key investor markets like Sydney and Melbourne, preliminary data would suggest the changes are not having the intended affect.

Furthermore, additional rate cuts could cause property prices to rise even further – something the Reserve Bank would be keen to avoid.

As a result, the Reserve Bank saw no reason to cut the cash rate again.

But while the Reserve Bank of Australia decided that no rate change was the best course of action for now, future rate cuts cannot be ruled out.

The Reserve Bank is likely to take a ‘wait and see’ approach to rates. They will continue to closely monitor the problems in Greece, as well the local economy, consumer sentiment and property price growth in Sydney and Melbourne.

If any of these areas give them cause for concern, they will not hesitate to pull the rate lever. They have done it before and there is nothing to stop them from doing it again this year.

Posted in: Interest rates

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