RBA surprise - cash rates on hold

April 18, 2015
Peter Dall

While many economists believed the Reserve Bank of Australia would cut the cash rate, the Board has decided to err on the side of caution and leave the cash rate untouched for the second consecutive month.

At their recent Board meeting, the Reserve Bank judged it was prudent to leave the cash rate alone again this month following February’s decision to cut the cash rate to the historical low of 2.25 per cent.

Australia's unemployment rate has fallen to 6.1 per cent in March and has now fallen for the last two months, also taking pressure off the Reserve Bank to cut interest rates next month.

The news sent the Australian dollar soaring, the currency rising 1.3 per cent to US77.79c at 11:31am.

The data will be welcomed by the Abbott government because it shows Australia is experiencing stronger-than-expected jobs growth.

And Sydney’s surging property market ultimately encouraged the Reserve Bank to leave the cash rate alone.

“While the falling value of iron ore combined with a sudden slump in both business and consumer sentiment had encouraged many economists to believe that the RBA would cut the cash rate again at the April Board meeting, it seems Sydney’s soaring property values have forced the RBA to leave the cash rate on hold for another month at least,” he said.

“Over the last 12 months, Sydney’s property values have shot up almost 14 per cent, with research conducted by RP Data showing values in the capital city rose by 3 per cent in March alone.

 “Across the country, Sydney is the only housing market where dwelling value growth remains in double digits, with the next strongest performer, Melbourne, showing a much slower rate of annual capital gain at just 5.6 per cent.”

“While the rest of the capital cities are experiencing more moderate growth, the RBA is clearly still wishing to tread carefully when it comes to Sydney and do not wish to do anything that could serve to inflate the capital city’s housing market further, hence the reason they have decided to leave the cash rate on hold for another month.  

But while rates were left on hold this month, Peter Dall said this doesn’t mean the country has entered into another prolonged period of interest rate stability.

“The Reserve Bank has made it very clear that they will cut the cash rate again in the not-too-distant future if the need arises. With that in mind, it is likely that the Reserve Bank will continue to keep a close eye on the economy, including the property market, business and consumer confidence, inflation as well as the rate of unemployment,” he said.

“Many of Australia’s leading economists believe the Reserve Bank will look to cut the cash rate again before the end of the financial year. If that does happen, we can expect home loan rates to fall further, which may or may not cause home values to grow.

 

The Reserve Bank sets the target 'cash rate', which is the market interest rate on overnight funds. It uses this as the instrument for monetary policy, and influences the cash rate through its financial market operations. Decisions regarding the cash rate target are made by the Reserve Bank Board and explained in a media release announcing the decision at 2.30 pm after each Board meeting. (Prior to December 2007, media releases were issued only when the cash rate target was changed.)

 

For further information or to arrange an appointment with Peter, call on 0414 583 233 or email peter.dall@mortgagechoice.com.au

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