RBA reveals cash rate decision - Dec 2017

As widely expected, the RBA has once again decided to hold the cash rate at 1.5 per cent.

It has now been 16 months since the cash rate last moved.

Many commentators anticipated this result. Every participant on the finder.com.au panel predicted that the rate will hold; brokers responding to the monthly HashChing survey were largely expecting no change (91.3 per cent); and RateCity’s analysis of 24 economic indicators suggested that there would be a slow-moving economy which would be unlikely to change anytime soon.

Mortgage Choice’s John Flavell said: “The latest data would suggest the Australian economy is performing relatively well at the moment and doesn’t need to be helped or hindered by a change to the cash rate. Property price growth has stagnated across Australia, which is in line with expectations.

“At the same time, consumer sentiment took a bit of a tumble, with pessimists once again outweighing optimists. In addition, inflation is currently sitting at 1.8 per cent, slightly below the Reserve Bank’s target band range of 2 [to] 3 per cent.”

He continued: “When you look at all of this economic data, it is clear that the Reserve Bank of Australia’s decision to leave the cash rate on hold for an extended period of time is having the desired effect on the economy.”

The Housing Industry Association’s Shane Garrett reciprocated this belief, claiming that Australia needs interest rates to stay at their current level.

“General inflationary pressures are well under control, but several components of demand are below par and need a supportive interest rate backdrop,” Mr Garrett said.

Meanwhile, AMP economist Shane Oliver predicted that there will be a rate hike in the future, but not anytime soon. He said: “Strong business conditions, strong employment and the RBA’s own expectations for stronger growth point to an eventual rate hike, but low inflation, record low wages growth, the slowing housing cycle, uncertainty around consumer spending and the still too high [Australian dollar] argue for flat or even lower rates.

“So, the outcome is likely to be on hold for the 16th month in a row.”

RateCity’s Sally Tindall also suggested that there will be a rate hike and believed it could occur before the end of 2018.

“While we won’t see a rate hike in the short term, if inflation starts to grow in the first half of next year, we may see a tightening of monetary policy before 2018 is out,” Ms Tindall said. 

CoreLogic’s head of research, Tim Lawless, argued that a rate hold would be the best course of action, as any attempts to raise the cash rate could result in a slower economic growth due to a subsequent rise in mortgage rates.

“Considering the record levels of household debt, most of which is concentrated within residential mortgages, higher interest rates will test household balance sheets, which are already thinly stretched,” Mr Lawless said.

“Households are already clamping down on spending, which is evident in the weak retail spending figures occurring against a backdrop of record-low wages growth.

“At this point, it is highly likely that an increase in the cash rate, and subsequent rise in mortgage rates, would further dampen household consumption, which in turn would likely lead to a slower economic growth.” 

[Related: RBA holds cash rate at record low]