RBA likely to leave rates on hold

The Reserve Bank board is expected to leave the official cash rate at 1.50 per cent when it holds its monthly meeting on Tuesday.

The board is facing conflicting pressures, which suggests it will take the middle ground by leaving the cash rate at 1.50 per cent, where it has been since August 2016.

On the one hand, the board might want to loosen monetary policy so it can boost the economy, with the latest data showing GDP growth at a sluggish 1.1 per cent.

A rate cut might also help lower the national unemployment rate, which is at an uncomfortable 5.9 per cent.

On the other hand, with the cash rate already at record-low levels, the board probably wants to gradually return rates to historical levels so it has room to cut in a future downturn.

Another reason the board might want to raise rates is to reduce price growth in several property markets, particularly Sydney and Melbourne.

Sydney’s median price surged 18.9 per cent in the 12 months to 31 March 2017, while Melbourne’s jumped 15.9 per cent, according to CoreLogic RP Data.

Two other capitals experienced double-digit growth – Canberra with 12.8 per cent and Hobart with 10.2 per cent.

Sally Tindall, money editor at RateCity.com.au, said that although the Reserve Bank board had caused surprises in the past, all the evidence pointed to the cash rate remaining on hold.

“The board would need compelling reasons to either reduce rates or increase rates – and those reasons just don’t exist,” she said.

“The GDP, unemployment and property data basically cancel each other out.

“The same goes for the inflation rate. In the last quarter, it increased from 1.5 per cent to 2.1 per cent, which means it’s now within the Reserve Bank’s target band of 2-3 per cent. By leaving the cash rate where it is, inflation is likely to remain within that desired range.”  

Looking ahead

Looking ahead to the rest of 2017, employment statistics and property prices are likely to play an important role in future interest rate decisions.

At last month’s meeting, board members said “developments in the labour and housing markets warranted careful monitoring over coming months”, according to the official minutes.

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