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The Reserve Bank of Australia (RBA) has lifted the official cash rate to 1.75 per cent, following its monthly monetary policy board meeting, the first increase since November 2010.
The sudden increase in the cash rate has come as a surprise to most industry pundits, with 35 of the 36 analysts on rate comparison website Finder.com.au’s panel predicting a hold verdict.
AMP Capital’s chief economist, Shane Oliver, was among the analyst that predicted a hold verdict but claimed that a rate cut would have been more appropriate in the current economic environment.
“While the threat to growth and inflation from the housing downturn (via reduced construction activity and negative wealth effects) is such that the RBA should cut interest rates in order to get in before unemployment starts rising, the most likely scenario is that they will continue to hold,” he said.
“The RBA probably needs to see more evidence that the slowdown seen in the second half last year is not just temporary, that consumer spending is under serious threat and that this will drive higher unemployment and lower for longer inflation.
“It will probably also want to see what sort of fiscal stimulus comes out of the budget and the federal election outcome.”
He added: “So rate cuts are probably still several months off.”
CoreLogic’s head of research, Tim Lawless, agreed: “Although the cash rate remains unchanged since August 2016, there is a growing likelihood that the cash rate will move lower later this year.
“While labour markets remain strong, low unemployment and above average jobs growth is generally confined to New South Wales and Victoria.”
Mr Lawless pointed to CoreLogic’s latest Hedonic Home Value Index, which reported that softening housing market conditions persist, with national dwelling values falling by 0.6 per cent in the month to 31 March.
“Concerns around slowing consumption as the wealth effect reverses – causing households to pull back on spending and revert to saving –were likely a central theme of the RBA’s board meeting deliberations,” he said.
“The ongoing falls in dwelling values have the potential to weigh down consumer attitudes towards spending and cause a sharper than anticipated fall in residential construction activity.”
Some pundits, like Stephen Koukoulas from Market Economics, were expecting the RBA to drop rates.
“The economy has slowed, with the per capita GDP recession in the second half of last year probably continuing into 2019,” he said.
“Inflation is low, and with the household sector under pressure from falling house prices, some policy stimulus is needed.”
The RBA’s cash rate announcement comes ahead of this evening’s release of the Coalition government’s budget for the 2019-2020 fiscal year.
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[Related: RBA confident in borrower resilience]
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