May cash rate announced

Much anticipated RBA decision comes amidst growing expectation of first cut since 2016

May cash rate announced


By Madison Utley

While economists have been divided on whether a cash rate cut was to be expected this afternoon, the odds for an alteration ahead of today's meeting were the highest they've been since the rate last moved in August 2016. 

However, the Reserve Bank of Australia (RBA) has announced that the rate will remain on hold at 1.5%.

Given the election set to take place at the end of this month, it is less surprising that the RBA would hold off on instituting a change.  Both the government and opposition are promising tax cuts intended to boost household finances, encourage spending and stimulate the economy at large.

According to CoreLogic head of research Tim Lawless, "The flat CPI reading for the March quarter wasn’t enough to drag interest rates lower, although the likelihood of a cash rate cut over coming months remains high.”

“While inflation remains below the RBA’s target range, labour markets generally remain relatively strong, supported by New South Wales and Victoria, and the decline in housing values has lost some speed over recent months,” he added.

Kristina Clifton, CBA senior economist, agreed that labour market growth has likely contributed to the decision, but expects the RBA to hold the rate at 1.5% for the “next couple of years.”

This view is tied to the disconnect between the stagnating GDP and the robust labour market.

She explained, “The RBA has talked a lot about the tension between the data, and not really having a full understanding of what’s happening at the moment.”

As such, RBA governor Philip Lowe has said it would take “a sustained rise in the unemployment rate” for the cash rate to be cut.

Clifton clarified, “We certainly have not seen that. We’re continuing to see decent jobs growth, and the unemployment rate is staying around 5%.”

Additionally, there has been a surge of doubt recently expressed concerning whether a cash rate adjustment would address the struggling economy in a meaningful way. 

Yesterday, Westpac CEO Brian Hartzer said that "interest rates are not the problem," and instead called for policy reform to inject life back into the economy in a sustainable and lasting manner. 

Lawless expressed his own reservations saying, “A reduction in mortgage rates would provide some support for housing demand, however, we may not see quite as much stimulus for housing market conditions that we have seen after previous rate cuts.”

“Generally, housing sentiment remains low and borrower mortgage serviceability is still assessed based on mortgage rates of at least 7%.

“Households who already have a mortgage, or prospective borrowers who are able to satisfy lender credit policies will be the winners if interest rates do fall later this year,” he concluded.

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