RBA sits tight once again on 2.5% cash rate

Interest rates will remain at record lows for another month, with the Reserve Bank of Australia (RBA) choosing not to change the overnight cash rate of 2.5%.

The cash rate has remained at 2.5% since August 2013.

The decision will come as no surprise to property industry commentators, with all 20 experts surveyed by finder.com.au predicting the cash rate would stay on hold this month.

Property Observer’s editor at large Jonathan Chancellor told finder.com.au that the RBA prefers to “let the economy look after itself as much as possible”.

“We probably won’t see any shift until 2015 when it will most likely be upwards,” he said.

According to LJ Hooker chief executive Grant Harrod, the RBA’s decision will keep demand from investors at a strong level.

“It’s a finely balanced domestic economy that has made the RBA reluctant to shift its current ‘neutral’ monetary policy position,” says Harrod.

“It now looks likely interest rates will remain on hold for the rest of the year, barring any unforeseen events and it should boost consumer confidence as we approach spring.

“There is some speculation rates could be dropped even further if the Australian dollar remains high.”

Harrod doesn’t expect that rising house prices will cause the Reserve Bank to increase interest rates, so long as inflation remains in the 2-3% target range and the unemployment rate continues at under 6%.

“Price growth has helped boost construction activity and in turn economic growth in general which is essential as we adjust to the fall in mining investment,” says Harrod.

RP Data research director Tim Lawless says the decision comes as value growth continues across the housing market at a moderated pace, with RP Data reporting a 1.1% increase in dwelling values over the quarter to June.

“Although the rate of growth is slowing, policy makers, including the RBA, are likely to be keeping a close eye on the ongoing increases in home values across the two largest cities (Sydney and Melbourne),” says Lawless.

He predicts that the cash rate will remain unchanged until next year.

“It is looking increasingly like the official cash rate will remain at its low setting, at least for the remainder of this year, which should continue to support housing demand.

“Capital gains over the past 12 months were recorded at 10.2% across the combined capital cities, however we are expecting growth rates to moderate over the coming months as natural affordability constraints and low rental yields in the largest capital cities work to slow the rate of capital gains,” Lawless notes.

This article first appeared on Property Observer.