As widely anticipated the RBA met today and kept interest rates on hold for another month.
Comment from Martin Lakos – Division Director, Macquarie Private Wealth:
This decision comes as no surprise as economic data released last month continues to help paint a picture of relative stability for the Australian economy.
- Stable economic conditions
Economic growth as measured by GDP was 3%, driven by improving service sectors which are benefitting from the past years depreciation of the Australian dollar. Unemployment dropped back to 5.8% and the various consumer and business confidence surveys were virtually unchanged.
- US central bank cautious
The US central bank has become more cautious on global growth and has adjusted the likelihood of just two rate rises this year instead of four. This is significant and Macquarie believes it may impact the RBA’s thinking going forward.
- Strong Australian dollar
The likelihood of fewer rate rises in the US implies that the US dollar will weaken and the Australian dollar will continue to strengthen. In fact our currency has rallied over 9% from a recent low of around $US0.69 in January to well above $US0.76.
Should the Australian dollar remain elevated for the next few months and subject to employment and inflation data released later in April, the RBA may well be considering cutting the official cash rate in May by 0.25% and again in August to assist a lower currency and realign Australia’s competitiveness.
Comment from Tim Lawless – Research director of Corelogic:
With annual growth in Australia’s capital city dwelling values falling to the slowest pace in 31 months by the end of March 2016, the RBA is likely to be focussing on other aspects of the economic landscape in their interest rate deliberations.
The higher Australian dollar, commodity prices, low inflation and global uncertainty were likely the primary discussion points during the Reserve Bank’s meeting today.
With some of the heat coming out of the housing market and inflation remaining low, the Reserve Bank has room to cut the cash rate later this year if they see a requirement to do so.
If we do see a lower cash rate later this year, chances are we won’t see the full rate cut passed on to mortgage rates due to the higher funding costs facing Australian lenders.
Arguably, a cash rate cut wouldn’t have the same stimulatory effect on the housing market as what we saw from previous rate cuts in February and May last year.