RBA keeps rates on hold at historic low of 1.5%

The Reserve Bank has left interest rates unchanged at the historic low of 1.5 % for the 20th consecutive meeting. The current holding pattern is the longest stretch without a move, with the RBA last changing rates with a 25 basis point cut in August 2016.

The decision was of little surprise, with the market pricing no chance of a move. RBA governor Philip Lowe maintained both the domestic and global economies were gaining strength.

Following a spate of stronger-than-expected data, economists have upgraded the consensus GDP growth forecast, to be released to tomorrow, to about 2.8 % year-on-year for the first quarter.

While increased government spending on infrastructure and a stronger contribution from the export sector had helped boost the RBA’s confidence, household spending remained a worry.

“Household income has been growing slowly and debt levels are high,” Dr Lowe said.

“Wages growth remains low. This is likely to continue for a while yet, although the stronger economy should see some lift in wages growth over time.”

The statement was largely unchanged, apart from acknowledging lending conditions were likely to tighten.

Alluding to the impact of the banking royal commission, Dr Lowe noted, “while there may be some further tightening of lending standards, the average mortgage interest rate on outstanding loans is continuing to decline.”

“We think there’s a real risk that tighter credit conditions could crimp GDP growth and contain price pressures,” Mr Dales said.

“That would mean the ‘progress in reducing unemployment and having inflation return to target’ would be even more ‘gradual’ than the RBA expects.”

Indeed.com economist Callum Pickering said raising rates would be particularly risky right now given house prices are falling steadily in both Sydney and Melbourne, geopolitical risks are ever present, and retail sales growth remains disappointing.

“The banking royal commission also raises the prospect of tighter lending conditions and out-of-cycle rate hikes by the major banks,” he said.

“The RBA may not need to tighten because the banks will do so independently.”