Why the RBA kept the cash rate on hold for May

Once again there was no movement to the cash rate this month, with the Reserve Bank of Australia (RBA) holding it at 1.50%. There were a number of factors behind this decision – the RBA is not only looking broadly at the Australian economy, but also at the national housing market. Here are the key details you need to know about yesterday’s decision.

The economy

Many of the key indicators show that the Australian economy is relatively strong at the moment. Unemployment remains low, growth is forecast for the next two years and the export of resources is picking up. Globally, there are also positive forecasts for growth, which has brought some certainty following recent volatility.

Two economic factors that influenced this month’s decision were inflation and employment. 

Inflation

This has been a big issue for the RBA this year as it has tried to implement policies that will bring low inflation within the target range of 2–3%. The latest Consumer Price Index data placed inflation at 2.1% for the first quarter of this year and growth over the next two years is expected to bring this figure up to 3%. This is good news for the RBA, as these figures are generally reflective of the health of the economy.

Employment

Unemployment is relatively low at the moment and we are set for further employment growth this year. A positive forecast such as this would typically be a reason for the RBA to increase the cash rate, however the Board is concerned about slow wages growth and for this reason, improved employment and inflation data wasn’t enough to trigger an increase to the cash rate. 

The Australian housing market

Australia’s housing market was the other key factor underpinning this month’s decision. Conditions around the country are mixed and it’s up to RBA to make decisions that will be in the best interest of the nation as a whole. With growth continuing in Sydney and Melbourne, the board is mindful of not fuelling this further. With many banks independently increasing interest rates due to external lending pressures, lenders have essentially taken care of this for the RBA. Despite these recent increases, interest rates remain at record lows and many lenders are still offering home loans with rates below 4%

Any decreases to the cash rate are likely to trigger more lending activity and the Board is concerned that the current growth in housing debt has outpaced the growth in household incomes. In an effort to keep this under control, it has kept rates on hold.

Related: What’s ahead for the Brisbane property market in 2017? 

Investment lending

The final piece of the puzzle is the recent changes to investment lending. At the end of March, the Australian Prudential Regulation Authority (APRA) announced that lenders needed to cap interest-only lending at 30% of all new residential home loans.

This is intended to keep the housing market stable and has affected some lenders more than others. As a result, most lenders have increased interest rates on investment loans and some lenders have almost reached their 30% threshold. This is not the case across the board and there are still a number of lenders accepting new loans.

Latest Brisbane property market stats

  • Official cash rate: 1.50%
  • Brisbane median house sale price: $653,000*
  • Brisbane median unit sale price: $445,900*
  • Auction clearance rate: 53%
  • Home loan interest rates starting from 3.69% p.a.

*These are the latest CoreLogic RP Data figures from January, 2017. They are based on sales data from the Brisbane City Council region only.


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Posted in: Interest rates

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