06 February 2017

Today's Reserve Bank Rate Decision

RBA Governer Philip Lowe, 2017
Image: Thanks to The New Daily

The financial markets and all economists had predicted the Reserve Bank of Australia (RBA) would keep the cash rate on hold and that's exactly what the RBA board did today.

The cash rate remains unchanged at 1.5 percent because of the strength in the national housing market over the second half of 2016. A consistent increase in investment projects since the rate cut in May and August last year was also a major factor in the RBA board retaining the current interest rate.

For Townsville, any further increase in the cash rate would be unwelcomed. Housing market conditions have been weak in North Queensland for the past 5 years. Darwin and Perth markets have also seen dwelling values drop since 2014, which as capital cities, were material factors in an unlikely rate increase.

It is likely the momentum in the housing market is one of the primary reasons why the Board did not jump on a rate decrease in an effort to stimulate spending and risk pushing inflation higher. Inflation has been tracking lower than the RBA's target range for just shy of 3 years.

CoreLogic reported; "capital city dwelling values were 10.7% higher over the past 12 months, which is a substantially higher growth rate than the 7.4% recorded over the same period a year ago." As a measure of contrast, the Townsville housing market saw a 8% decrease in dwelling values in the past 12 months.

Housing market conditions have pulled back on par with the previous rate reductions and the repetitive rise in investor involvement due to the accelerated pace of capital gains in the major capital cities. However, housing conditions vary considerably across the country. 

Mr Philip Lowe, Reserve Bank Governor, said; "Growth in rents is the lowest it's been in eastern markets for a couple of decades." Despite slowing rent growth, lending for investors has picked up. Lenders are cautious about lending in some sectors with a stiffening of supervisory measures being applied in these higher risk markets.

Still, the cost of debt remains historically low which should see demand for housing remaining strong from owner occupiers and investors, despite the cash rate staying on hold and some lenders making subtle increases to their mortgage rates.

Improvements in the global economy have provided a boost in commodity prices resulting in better than expected trade conditions for Australia. China's investment in infrastructure and construction contributed higher spending and stronger growth over the second half of 2016.

Financial markets have performed effectively. Most global stock markets have risen. Inflation is quite low and under control at 1 1/2 percent. This is expected to continue as labour costs will remain low moving forward.


Reserve Bank of Australia rate announcement


References:

Research Bank of Australia (RBA)
Corelogic
Rapid Realty Australia
Herron Todd White