Rates on hold for good thanks to faltering confidence and property values

At its meeting this week, the RBA decided to leave the cash rate unchanged at 2.5%.

It is now almost a year since the Australian federal bank last tweaked the cash rate, and according to Paul Bloxham, Chief Economist, Australia & New Zealand, HSBC Bank Australia this holding pattern is set to continue.

“The statement from the RBA repeated that the ‘most prudent course is likely to be a period of stability in interest rates’. At the same time, the commentary suggested concerns about the high AUD, particularly in the face of falling commodity prices,” said Bloxham.

The high AUD is slowing the pace of rebalancing of the economy away from its long-term dependency on resources, according to Bloxham. “However, we do not expect any direct action from the RBA to lower the AUD and it seems unlikely that they would consider further rate cuts, for fear of overinflating the housing market.”

“The more likely response is a more prolonged period of lower rates. We expect rates to be on hold for the rest of this year, with our central case seeing the RBA needing to lift rates in early 2015.

Shane Oliver, Head of Investment Strategy and Chief Economist, AMP Capital, said that with a significant degree of monetary stimulus already in place and March quarter GDP growth coming in stronger than expected, “there is little case to cut interest rates”. He added, “But with consumer confidence remaining depressed as a result of the May Budget, anecdotal evidence pointing to a flow on to retail sales, inflation remaining benign and the Australian dollar being uncomfortably high there is no case to raise rates either. In fact, interest rates now look like being on hold into next year.”

Jessica Darnbrough from mortgage broker, Mortgage Choice agreed the RBA’s decision is linked to sluggish consumer confidence, as well faltering property values. “According to the latest Westpac Melbourne Institute of Consumer Sentiment, confidence climbed just 0.2% in June. Overall, consumer sentiment remains 6.6% below the pre-Budget level recorded in April and 15.6% below the post-election high recorded in November last year,” said Ms Darnbrough.

Ms Darnbrough said the RBA would have also been swayed by slowing property values. “Research conducted by RP Data found property values rose by 1.4% in June after posting a 1.9% drop in May,” she said.

“Over the last quarter, dwelling values have remained fairly stagnate. Sydney currently leads the pack, with values climbing just 1% in the capital city over the last three months. At the other end of the scale, Melbourne has endured the biggest fall in values, with the city recording a 2.4% drop over the quarter.”