NEWSFLASH: RBA leaves cash rate on hold

by 04 Feb 2014
The reserve bank's decision to leave the official cash rate on hold this month has come as no surprise to economists.

A stronger than expected inflation result and improvement in business confidence has encouraged the Reserve Bank of Australia to leave the official cash rate on hold at 2.5% for the sixth consecutive month. 

Tim Lawless, national research director at RP Data, says the "raft of positive data flows" in recent weeks were a good early indicator that the RBA would not be changing rates.

"From a housing market perspective, the release of the RP Data – Rismark Home Value Indices yesterday showed home values were still rising across Australia, up a strong 1.2 per cent over the month of January," said Lawless. "The latest housing market results take annual capital gains across the combined capital cities to 9.8%, with every capital city apart from Hobart recording a rise in dwelling values over the year.

"Further, consumer confidence currently remains comfortably in the zone where optimists outnumber pessimists. According to the latest Westpac Melbourne Institute of Consumer Sentiment Index, Australians are relatively optimistic about the economy, and there is evidence that both house prices and housing activity are responding well to the low interest rate environment. 

" Finally, the inflation results for the December quarter were stronger than expected, with underlying inflation climbing by 0.9% to sit right in the middle of the RBA’s target band range. This surprise jump in inflation in the final quarter of 2013 has signfiicantly reduced the chance of another rate cut by the Reserve Bank. We expect the RBA to err on the side of caution and leave the cash rate untouched for the foreseeable future."
 
Mortgage Choice spokesperson Jessica Darnbrough said the decision was largely unsurprising given the recent strength of the Australian economy.
 
"New research from National Australia Bank found business conditions and confidence is on the up, with conditions reaching a two and a half year high," she said.
 
"Further, the inflation results for the December quarter were stronger than expected, with underlying inflation climbing by 0.9% to sit right in the middle of the RBA's target band range.
 
"This surprise jump in inflation in the final quarter of 2013 has reduced the chance of another rate cut in the official cash rate by the Reserve Bank."
 
On top of the strong inflation and business confidence results, Ms Darnbrough said consumer confidence currently remains comfortably in the zone where optimists outnumber pessimists.
 
"According to the latest Westpac Melbourne Institute of Consumer Sentiment Index, Australians are relatively optimistic about the economy. There is evidence that both house prices and housing activity are responding to well the low interest rate environment and this is no doubt having a positive impact on confidence," she said.
 
According to Ms Darnbrough, this spate of positive economic data suggests the Reserve Bank of Australia was right to leave rates on hold this month. Further, it indicates that the official cash rate could remain on hold for some time.
 
"We expect the RBA to err on the side of caution and leave the cash rate untouched for the foreseeable future. With this in mind, now may be a good time for Australians to jump onto the property ladder and take advantage of this low rate environment," she said.
 
"Alternatively, if you already have a property, now could be a good time to review your current home loan and check to make sure you are still in the right product for your needs."

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