RBA keeps rates on hold for its last board meeting of 2016

The Reserve Bank has decided to keep interest rates on hold at an all-time low of 1.50% at its last board meeting of the year.

It’s the fourth consecutive month the cash rate has remained on hold, with the RBA having last slashed rates in August after three consecutive months on hold at 2.0%.

The board will not convene again until February.

The result comes as no surprise to economists and academics who did not expect any movement until early-2017.

Although inflation is currently below the RBA’s 2-3% target and wages growth is sluggish, both are expected to improve in the near future.

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Members of the central bank board were expected to be more concerned about the risks facing the economy in 2017, rather than the need for further tweaking of monetary policy so close to the end of the year.

On one hand the RBA was likely considering the sluggish inflation numbers, the likelihood of a low or even negative economic growth reading when GDP data is released tomorrow, record low wage growth of 1.9% in the year to September and the loss of approximately 50,000 full time jobs in the year to October, according to CoreLogic research director Tim Lawless.

“In balance, there are plenty of reasons why the RBA would keep rates on hold such as the rebound in housing market strength and housing investment activity, a surge in commodity prices, and potentially a lower Australian dollar as the US looks to increase interest rates,” he said.

The reacceleration in housing values in some cities was likely a topic of discussion at the RBA, particularly considering the rebound in dwelling values that has been evident across some cities coincided with the two rate cuts earlier this year. 

The May and August rate cuts were also accompanied by an aggressive rise in investment activity. 

“A decision to cut the cash rate to new record lows could add further incentive to investors and owner occupiers which could push housing values even higher,” Lawless said.

Also read: Are bank rate hikes a sign of what’s to come?

“The next RBA meeting isn’t until February 7^th. By this time the RBA will have had time to consider the performance of the housing market over the final quarter of 2016, as well as GDP figures for September and inflation numbers for the  December quarter.”

“Additionally there will be further clarity on the US economy where unemployment has reached a nine year low and interest rates are about to start ratcheting higher,” he said.

At 1.5%, the cash rate is still highly expansionary and, together with other factors, is likely to keep housing demand strong.

 

Philip Lowe, Governor: Monetary Policy Decision

"The global economy is continuing to grow, at a lower than average pace. Labour market conditions in the advanced economies have improved over the past year. Economic conditions in China have steadied, supported by growth in infrastructure and property construction, although medium-term risks to growth remain. Inflation remains below most central banks’ targets, although headline inflation rates have increased recently. Globally, the outlook for inflation is more balanced than it has been for some time."

"Commodity prices have risen over the course of this year, reflecting both stronger demand and cut-backs in supply in some countries. The higher commodity prices have supported a rise in Australia’s terms of trade, although they remain much lower than they have been in recent years. The higher prices are providing a boost to national income.

"Financial markets are functioning effectively. Government bond yields have risen further with the adjustment having been orderly. Funding costs for some borrowers have also risen, but remain low. Globally, monetary policy remains remarkably accommodative.

"In Australia, the economy is continuing its transition following the mining investment boom. Some slowing in the year-ended growth rate is likely, before it picks up again. Further increases in exports of resources are expected as completed projects come on line. The outlook for business investment remains subdued, although measures of business sentiment remain above average.

"Labour market indicators continue to be somewhat mixed. The unemployment rate has declined this year, although some measures of labour underutilisation are little changed. There continues to be considerable variation in employment outcomes across the country. Part-time employment has been growing strongly, but employment growth overall has slowed. The forward-looking indicators point to continued expansion in employment in the near term.

"Inflation remains quite low. The continuing subdued growth in labour costs means that inflation is expected to remain low for some time, before returning to more normal levels.

"Low interest rates have been supporting domestic demand and the lower exchange rate since 2013 has been helping the traded sector. Financial institutions are in a position to lend for worthwhile purposes. These factors are assisting the economy to make the necessary adjustments, though an appreciating exchange rate could complicate this.

"Conditions in the housing market have strengthened overall, although they vary considerably around the country. In some markets, prices are rising briskly, while in others they are declining. Housing credit has picked up a little, although turnover of established dwellings is lower than it was a year ago. Supervisory measures have strengthened lending standards and some lenders are taking a more cautious attitude to lending in certain segments. Considerable supply of apartments is scheduled to come on stream over the next couple of years, particularly in the eastern capital cities. Growth in rents is the slowest for some decades.

"Taking account of the available information, and having eased monetary policy earlier in the year, the Board judged that holding the stance of policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time."