The rate that stops the nation; cash rate held at 1.5%

While Australians were celebrating the Melbourne Cup, the Reserve Bank of Australia (RBA) left the cash rate unchanged yet again at an historic low of 1.5 per cent.

In a statement released yesterday, Governor Philip Lowe highlighted how the RBA appear to be stuck between a rock and a hard place. They linked the decision to hold the rate to several conflicting factors, including low wage growth and inflation paired against growing housing debt and housing market conditions across the country.

While the labour market has seen improvement, with employment rising in all states, wage growth is expected to remain low for some time yet.

“Wage growth remains low in most countries, as does core inflation. Headline inflation rates are generally lower than at the start of the year, largely reflecting the earlier decline in oil prices.

“The central forecast is for GDP growth to pick up and to average around 3 per cent over the next few years,” said Governor Lowe.

The RBA also looked at the Australian dollar appreciating since mid-year, and a higher exchange rate as a factor contributing to subdued price pressures in the economy.

“It is also weighing on the outlook for output and employment. An appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast,” said Governor Lowe.

Growth in housing debt has been outpacing the slow growth in household income for some time.

This has resulted in APRA introducing several supervisory measures to combat potential risks like what happened in the 2008 housing market crash in the United States. These measures have had some positive impacts on the housing market, with the market in Sydney easing.

However, this is not the case across the country. In most cities, “housing prices have shown little change over recent months, although they are still increasing in Melbourne,” said Governor Lowe.

“Taking account of the available information, the 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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