Interest Rates Remain On Hold

Martin Lakos, Macquarie Wealth

Martin Lakos, Macquarie Wealth

The Reserve Bank of Australia has announced the official cash rate for May, setting a new record. The board has decided to hold the cash rate at its record low of 1.50 per cent, for a record-breaking 19th consecutive month. 

The decision had been widely predicted and came as no surprise to the assistant governor for financial markets at the RBA, Christopher Kent.

Speaking at the Housing Industry Association breakfast in Sydney last week, Mr Kent said that the decision is a product of unemployment and inflation.

“What the RBA governor has made very clear is that what we’ve seen is a gradual decline in the unemployment rate over recent years, and what we’re forecasting [is] that continues to decline — but only gradually,” Mr Kent told an industry briefing last week.

“The same is true for inflation. A gradual rise and it is expected to continue to rise quite gradually. So, the fact that there is progress suggests that the next move in interest rates by us is likely to be up, not down, but the fact that it is gradual means that there is no particular rush to do that.”

AMP Capital chief economist Shane Oliver said that there were many reasons why the RBA kept the cash rate as is for another month.   

“Strong business conditions and employment, rising non-mining investment, strong global growth and the RBA’s own forecasts argue against a cut,” Mr Oliver said.

“But low inflation and wages growth, risks around the outlook for consumer spending, the slowing Sydney and Melbourne property markets and tightening bank lending standards argue against a hike.”

Mortgage Choice spokesperson Jacqueline Dearle said that the RBA would leave the cash rate as is until the economy can “better absorb” the impact of an increase and until inflation is at, or near, 2 per cent.

Economist at Corinna Economic Advisory Saul Eslake had also predicted a no-change verdict.

“None of the data released since the last meeting, nor anything else that has occurred since then, will have altered the RBA’s assessment of the economic outlook sufficiently to prompt a change in its view that current monetary policy settings are appropriate for the time being,” Mr Eslake said.

REA Group chief economist Nerida Conisbee said that although momentum seems to be slowly building in the Australian economy, it still isn’t at a point where interest rates will start to increase.

“We are now running at quite a different speed to large parts of the rest of the world,” Ms Conisbee said. 

“Our time will come, but it is taking a lot longer than expected.”