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Interest rates put on hold at 2%, but for how long?

Posted by nimda on March 1, 2016
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The Reserve Bank of Australia has opted to leave interest rates on hold at 2% amid economic uncertainty and a slowdown that has seen house prices stall in some markets.

The RBA hasn’t changed the cash rate since last May when it cut it by 25 basis points.

With inflation at 1.7% according to the Australian Bureau of Statistics and unemployment now at 6%, up from 5.8% in December, most economists had predicted that the RBA would leave interest rates on hold for now.

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Is this good news?

CoreLogic RP Data research director Tim Lawless has welcomed the decision.

“The hold decision from the RBA came as no surprise today, considering labour markets are holding up and housing market conditions have moderated but remain firm.  The fact that the rate of capital gains has wound down across the housing market and investor activity is reducing from the highs of mid last year are likely to be welcomed developments from the Reserve Bank,” he says. 

But with the downturn in the resource sector continuing as commodity prices decline and banks tighten lending criteria, Lawless say this may not last.

“If the RBA were to provide another cash rate cut later this year, they probably wouldn’t need to worry too much about over stimulating the housing market; mortgage rates are already higher than a year ago due to the higher capital requirements implemented by APRA and the pace of investment credit growth is tracking well below the 10% speed limit imposed in December 2014,” Lawless says.

“With inflation tracking around the bottom of the RBA target range of two to three per cent, the Reserve Bank can work to stimulate the economy by dropping the cash rate further if they see a requirement to do so.”

Will rates go up or down in 2016?

Dwelling values are up with CoreLogic’s Home Value Index  showing a rise of 0.5% for properties in capital cities in February, with the overall trend showing some signs of a slow down with the index that was at 11.1% now down overall to 7.6%.

But most experts are predicting that if the RBA makes a move later in the year, it is more likely to cut rates than increase them.

Bank of Queensland’s head of market analysis Peter Munckton predicts that if rates change at all in 2016, they are more likely to go down.

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“I’d be very surprised, shocked actually, if there was a move up this year and in actual fact I think there’s a better than even-money chance that they’ll have to cut sometime in the second half of the year,” he says.

“It’s not because I think the Australian economy is doing too badly – it’s more with inflation, given the global economic and financial risk.”

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