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October – Interest Rates On Hold

By Rachael Vrana

The Reserve Bank of Australia has made good on economist predictions and once again kept the official cash rate on hold at 2.50% p.a. This marks 14 months since the rate has shifted. RBA Governor Glenn Stevens indicated that financial conditions remain ‘very accommodative’ and growth is moderate.

“Interest rates are very low and have continued to edge lower over recent months as competition to lend has increased. Investors continue to look for higher returns in response to low rates on safe instruments. “Credit growth is moderate overall, but with a further pick-up in recent months in lending to investors in housing assets. Dwelling prices have continued to rise over recent months.”

The RBA also flagged that inflation is expected to be consistent with the 2–3% target over the next two years. The falling Australian dollar was one factor in the decision. Since the RBA board’s September meeting, the dollar has fallen 6% to 86.63 US cents, after hitting a year high of 95.04 US cents back in July.

Commonwealth Bank economist John Peters told AAP that the slide in currency is a “welcome development for the central bank and will help the transition to non-mining led growth. “It also gives the RBA more scope to hike rates amid rising concerns about the elevated level of investor activity in the housing market,” he says.

Rising house prices and investor activity have been raised by the RBA as something to watch, and one recent survey of economists flagged the likelihood of a cycle of interest rate rises in the new year as a mitigating measure.

RP Data Research Director Tim Lawless says the softer housing conditions through September may have moderated earlier Board concerns about market overheating. However he notes, “it will be important to monitor the trend rate of growth, particularly across Sydney and Melbourne, where values have risen substantially more than any other city.

“Investor interest in these markets has been significant compared with other capital cities and compared with historical ratios of owner occupier loans to investor loans.

“If investor interest in these markets doesn’t moderate we can expect the RBA, in conjunction with APRA, to intervene via prudential regulation of the banking sector to attempt to slow down the level of investment lending activity in the market.” Chairman of mortgage comparison service Loan Market,  Sam White, says a stable rate is good news for first home buyers and property owners.

“Spring is traditionally a time for people to be on the move and the fierce competition among lenders, offering extremely low fixed rate products and even cash incentives, means consumers now have more options than ever to secure the best deal,” he says. The RBA meets again on November 4.


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