RBA leaves interest rates on hold at 1.5 per cent … BRISBANE TIMES July 03, 2018 at 06:03AM

RBA leaves interest rates on hold at 1.5 per cent … BRISBANE TIMES


RBA leaves interest rates on hold at 1.5 per cent

By Eryk Bagshaw

The Reserve Bank left the cash rate on hold at 1.5 per cent for the 21st consecutive meeting on Tuesday, citing a cooling housing market, high-household debt, low inflation
and torpid wage growth as key concerns.

“The low level of interest rates is continuing to support the Australian economy,” the RBA said in a statement. “Further progress in reducing unemployment and having inflation
return to target is expected, although this progress is likely to be gradual.”

The market has not fully priced in a rate rise until October 2019, by which time rates would have been on hold for more than three years – the entirety of governor Philip
Lowe’s time in charge.

The RBA’s prolonged stasis has meant attention has turned to out-of-cycle rate rises from banks to cope with higher funding expenses.

“Focus is now moving to mortgage rates, where we are increasingly seeing upwards pressure from overseas funding costs,” CoreLogic’s head of research, Tim Lawless, said. “Already, smaller banks and non-banks, who
are generally more exposed to wholesale debt costs, are pushing interest rates higher for select mortgage products.”

He said while average variable rates remained almost 120 basis points below their decade average of 6.4 per cent, the big four banks could soon start considering rate rises themselves.

“Larger banks, who are more reliant on domestic deposits to fund their home loans, have less exposure to higher funding costs,” Mr Lawless said. “However, it is likely margin pressures are becoming evident across
the big end of town as well.”

All but three of 26 economists surveyed by the BusinessDay Scope economic survey expect no move in the cash rate in the rest of 2018. Thirteen expect the next move to be up, but not until June 2019, when there
would have been a record 34 months of inaction.

Industry Super chief economist Stephen Anthony said he believed the next move in official interest rates was likely to be down, probably by mid-2019.

“By then, measured prices growth will still likely be below the mid-point of the RBA target range, residential house price declines on the east coast of Australia will probably be double digit and residential
housing investment may be falling sharply,” he said. “All this will leave Australian households feeling more uncertain about the outlook for jobs and activity.”

The majority of economists could not see any movement in rates until at least June next year, but JP Morgan’s Sally Auld warned there was a looming “non-trivial risk” that the RBA might miss the opportunity to
start to normalise monetary policy – leaving Australia overexposed to a global shock.

“Indeed, until the RBA is confident that the slowing in credit growth and house prices has not negatively impacted the trajectory of household consumption spending, it will be highly unlikely to consider moving
rates higher and consequently, rates are likely to be on hold for a protracted period,” she said.

“This leaves the RBA at the mercy of global developments, and potentially, very vulnerable to the next global downturn. Were such an event to be realised, it is highly probable that the next move in rates in Australia
is down.”

Others are more optimistic. University of Tasmania economist Saul Eslake said he believed inflation would start to move back into the central bank’s target range of 2-3 per cent by May next year.

“It should feel sufficiently confident that economic growth is ‘around trend’ and that labour market slack is decreasing; and that wages growth should have picked up a little bit,” he said.


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