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Category: Money and Monetary Policy / Economic Trends / Banking

Reserve Bank holds interest rates steady at 1.5pc

12:30 UTC+8 April 4, 2017 | Michael Janda

The RBA is navigating a path between weak inflation with modest economic growth, and surging home prices. (AAP)

The Reserve Bank has left interest rates on hold at a record low 1.5 per cent for the eighth month in a row, as it remains torn between a surging housing market and sputtering economy.

The decision came as no surprise, with all 50 economists surveyed by Reuters ahead of the RBA board meeting expecting a steady cash rate.

The key challenge for the RBA is surging home prices across Australia's major south-eastern centres at the same time as inflation, wages, job creation and economic growth remain subdued.

Hot home prices make it impossible for the Reserve Bank to cut interest rates again, as it would likely further stoke real estate demand, while subdued economic growth and inflation mean the RBA cannot raise rates to deflate what many analysts now agree is a housing bubble.

Reserve Bank governor Philip Lowe has expressed this dilemma in recent speeches and in testimony before Parliament.

However, in his post-meeting statement, Dr Lowe endorsed the recent actions taken by bank regulator APRA to try and stem some of the housing market risks.

So it's a bubble. Now what?


Regulators finally admit Australia has a property bubble, but is it too late to deflate it without popping it? asks Ian Verrender.

"Growth in household borrowing, largely to purchase housing, continues to outpace growth in household income," he noted.

"By reinforcing strong lending standards, the recently announced supervisory measures should help address the risks associated with high and rising levels of indebtedness.

"Lenders need to ensure that the serviceability metrics that they use are appropriate for current conditions.

"A reduced reliance on interest-only housing loans in the Australian market would also be a positive development."

While the RBA is hoping that APRA can successfully cool the housing market, it also noted deteriorating conditions across some other parts of the economy.

"Some indicators of conditions in the labour market have softened recently," Dr Lowe observed.

"In particular, the unemployment rate has moved a little higher and employment growth is modest.

"The various forward-looking indicators still point to continued growth in employment over the period ahead. Wage growth remains slow."

Independent bank rate rises may delay official increase

In the context of its continuing concern about runaway home prices in south-east Australia, the Reserve Bank would no doubt be quietly thankful that most retail banks have increased their mortgage rates independently, especially for investors.

RBA cash rate explained


ABC business reporter Michael Janda explains how the RBA's cash rate affects the interest rate you pay on your home loan.

Some analysts also say that the banks' mortgage rate increases are a blessing in disguise, as they mean the RBA can afford to keep the official cash rate on hold.

"While recent independent rate rises have been unpopular with homeowners, the banks may have given the RBA breathing space to hold out longer before making a move," argued Graham Cooke from interest rate comparison website Finder.

"We're expecting the Reserve Bank to stay in its 'wait and see' mode for the foreseeable future."

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