Reserve Bank leaves cash rate on hold

The Reserve Bank has left its cashrateon hold at 1.5 per centafter inflationmoved up to the central bank’s target level of 2-3 per centfor the first time since 2014.
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Official rates have remained unchanged since August last year.

Despite the effect an interest rate rise would have on cooling the housing market, the move to leave interest rates unchangedwas unanimously predicted by economists, with few expecting a rate hike before mid-2018.

In astatement released after the meeting on Tuesday, the bank signalledit wasclosely watchingdevelopments in the Australian housing market while also deliveringa balanced assessmentof the local and global economy.

The RBA highlighted a weaker labour market with theunemployment rate movinga little higher over recent months despiteemployment growth being alittle stronger.

It also pointed to stronger than expected global conditions despite continuing medium-term risks from China.

“The improvement in the global economy has contributed to higher commodity prices, which are providing a significant boost to Australia’s national income,” RBA governorPhilip Lowe said.

Housing affordability remained a central concern of the bank’s deliberations although it said “the recently announced supervisory measures should help address the risks associated with high and rising levels of indebtedness”.

CoreLogic’shead of research, Tim Lawless, said housing would have been “front and centre of the conversation” during the central bank’s meeting.

“Capital city dwelling values have increased by almost 10 per centsince the latest round of rate cuts in May and August last year, led by gains of around 13 per cent in Sydney and Melbourne,” he said.

“With household debt levels at record highs, and the large majority of this debt related to housing, higher mortgage rates have the potential to take some heat out of the market, particularly from the investor segment.A housing market slowdown would relieve one of the key concerns the RBA has relating to financial stability.”

Dr Loweis set to give a “household debt, housing prices and resilience” speech on Thursday as the debate over solving the affordability crisis continues.

The shadow RBA board at Australian National University’s Centre for AppliedMacroeconomicAnalysis said the big unknown wasnext week’s federal budget.

“It will likely include a housing package, yet big reforms such as changes to negative gearing and capital gains tax concessions are off the table,” Timo Henckel said.

“The government’s announcement to fast-track last year’s $50 billion infrastructure plan will generate a sizeable fiscal stimulus.”

The Australian dollar was steady at US75.40¢.

The US Federal Reserve is alsoexpected to keep interest rates on hold at 1 per centafter figuresshowed theUS economy grew at its slowest pace in three years in the first three monthsof 2017.

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