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Reserve Bank leaves cash rate on hold at 1.5 per cent in May

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The Reserve Bank has left its cash rate on hold at 1.5 per cent after inflation moved up to the central bank’s target level of 2-3 per cent for the first time since 2014. 

Official rates have remained unchanged since August last year.  

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Despite the effect an interest rate rise would have on cooling the housing market, the move to leave interest rates unchanged was unanimously predicted by economists, with few expecting a rate hike before mid-2018.

In a statement released after the meeting on Tuesday, the bank signalled it was closely watching developments in the Australian housing market while also delivering a balanced assessment of the local and global economy. 

The RBA highlighted a weaker labour market with the unemployment rate moving a little higher over recent months despite employment growth being a little stronger.

It also pointed to stronger than expected global conditions despite continuing medium-term risks from China. 

“The improvement in the global economy has contributed to higher commodity prices, which are providing a significant boost to Australia’s national income,” RBA governor Philip Lowe said. 

Housing affordability remained a central concern of the bank’s deliberations although it said “the recently announced supervisory measures should help address the risks associated with high and rising levels of indebtedness”.

RBA governor Philip Lowe is set to give a "household debt, housing prices and resilience" speech on Thursday as the ... RBA governor Philip Lowe is set to give a “household debt, housing prices and resilience” speech on Thursday as the debate over solving the affordability crisis continues.  Photo: Bloomberg

CoreLogic’s head of research, Tim Lawless, said housing would have been “front and centre of the conversation” during the central bank’s meeting. 

“Capital city dwelling values have increased by almost 10 per cent since the latest round of rate cuts in May and August last year, led by gains of around 13 per cent in Sydney and Melbourne,” he said. 

CoreLogic's head of research, Tim Lawless, said housing would have been "front and centre of the conversation" during ... CoreLogic’s head of research, Tim Lawless, said housing would have been “front and centre of the conversation” during the central bank’s meeting.  Photo: Bloomberg

“With household debt levels at record highs, and the large majority of this debt related to housing, higher mortgage rates have the potential to take some heat out of the market, particularly from the investor segment. A housing market slowdown would relieve one of the key concerns the RBA has relating to financial stability.” 

Dr Lowe is set to give a “household debt, housing prices and resilience” speech on Thursday as the debate over solving the affordability crisis continues. 

The shadow RBA board at Australian National University’s Centre for Applied Macroeconomic Analysis said the big unknown was next week’s federal budget. 

“It will likely include a housing package, yet big reforms such as changes to negative gearing and capital gains tax concessions are off the table,” Timo Henckel said.

“The government’s announcement to fast-track last year’s $50 billion infrastructure plan will generate a sizeable fiscal stimulus.”

The Australian dollar was steady at US75.40¢.

The US Federal Reserve is also expected to keep interest rates on hold at 1 per cent after figures showed the US economy grew at its slowest pace in three years in the first three months of 2017.

More to come  

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