Reserve Bank keeps interest rates on hold at historic low of 1.5 per cent in June

The Reserve Bank of Australia (RBA) has left the cash rate at a record low 1.5 per cent for the 10th consecutive month. 

Interest rates steady for now

The Reserve Bank leaves the cash rate at 1.5 per cent. Eryk Bagshaw explains the decision.

The decision was unanimously predicted by economists thanks to meagre gross domestic product (GDP) growth, stubbornly low wages and soft construction, despite surprisingly strong retail sales figures

In his statement, Reserve Bank governor Philip Lowe highlighted that “slow growth in real wages” was restraining growth in household consumption.

“Employment growth has been stronger over recent months, although growth in total hours worked remains weak,” he said.

“Wage growth remains low and this is likely to continue for a while yet.”

The last time the central bank adjusted rates was in August when inflation slowed to 1 per cent, but it has since moved back towards the bank’s target band of between 2 and 3 per cent. 

Dr Lowe said inflation was expected to increase gradually as the economy strengthened.

Five of 23 forecasters surveyed by Bloomberg are now predicting a cut within the next year, as house prices begin to cool in the overheated eastern housing markets. 

During the seasonally weak month of May, property monitor CoreLogic reported a month of house prices going backwards nationally for the first time in 18 months. 

Dwelling prices fell 1.7 per cent in Melbourne and 1.3 per cent in Sydney.

Dr Lowe noted the developments in his statement. 

“Prices have been rising briskly in some markets, although there are some signs that these conditions are starting to ease,” he said. “In other markets, prices are declining.” 

CoreLogic’s head of research, Tim Lawless, said: “If this recent slowing develops into a more sustained trend, the Reserve Bank may be able to consider alternative scenarios to a steady cash rate.”

The more house prices calm down, the more room the RBA has to cut rates by minimising the risk of stoking the market. 

But Mr Lawless warned the last time rates were cut, in August last year, “the housing market reignited, with capital gains accelerating and investors surging back into the market”. 

He said recent moves by the Australian Prudential Regulation Authority to crack down on investor loans should avoid a repeat scenario if the central bank were to cut within the next year.

Dr Lowe said the recent supervisory measures should help address the risks associated with rising levels of indebtedness.

He noted lenders had announced increases in mortgage rates, particularly those paid by investors and on interest-only loans.

The governor said GDP growth was expected to have slowed in the three months to the March quarter, when the statistics are released on Wednesday, reflecting the quarter-to-quarter variation in the growth figures.

“Looking forward, economic growth is still expected to increase gradually over the next couple of years to a little above 3 per cent,” he said. 

Capital Economics’ chief Australia & New Zealand economist, Paul Dales, said the forecasting group had revised down its GDP forecast from 0.3 per cent to -0.5 per cent, the second GDP contraction in nine months, putting Australia on track for a 1.4 per cent annual growth.  

“Things would get very tricky for the RBA if GDP fell in the first quarter and fell in the second quarter,” he said, referring to the next set of GDP figures due in September. 

“Even if the RBA still doesn’t want to cut interest rates below 1.5 per cent for fear of stoking the housing market and even if it thinks any such recession is due to temporary factors, it would be very brave for it to sit on its hands when the papers are shouting about the first recession in 26 years.” 

In its statement the RBA board judged that “holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time”. 


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