Interest rates still on hold at record low of 1.5pc as economy looks set to slow

| 04.09,18. 04:46 PM |

Interest rates still on hold at record low of 1.5pc as economy looks set to slow

Photo: The interest rate move from the Reserve Bank is disappearing further over the horizon. (Reuters: David Gray)

The Reserve Bank has extended its record hold of interest rates at the emergency low setting of 1.5 per cent to 25 months.

With home lenders such as Westpac and Suncorp starting to raise rates independently of the RBA, and economic data generally weaker over the month, there was never any doubt rates would be kept on hold.

The market had priced in no chance of a change and the odds of a hike have been continually pushed into the future.

This year, the ASX cash rate futures market has seen the chances of a full 25-basis-point rate rise through to the end of 2019 slide from likely to almost non-existent.

The RBA's decision comes ahead of tomorrow's national accounts, which are expected to show annualised GDP growth has slipped from 3.1 per cent to 2.8 per cent over the June quarter.

The bank also recently downgraded its short-term inflation forecast from the bottom of its target band of 2-3 per cent to 1.75 per cent.

The last movement from the RBA was a cut in August 2016. The last rate rise was in November 2010.

Still upbeat

RBA governor Philip Lowe's statement remained upbeat, arguing the Australian economy grew at above trend pace in the first half of the year.

However, Dr Lowe pointed to debt and drought as looming concerns in the domestic economy.

"Household income has been growing slowly and debt levels are high. The drought has led to difficult conditions in parts of the farm sector," Dr Lowe said.

The RBA also appears to be not overly concerned with the out-of-cycle rates rises emerging in the home lending sector.

"Money-market interest rates are higher than they were at the start of the year, although they have declined somewhat since the end of June," Dr Lowe said.

"Some lenders have increased mortgage rates by small amounts, although the average mortgage rate paid is lower than a year ago."

The spread between the RBA's cash rate and the bank bill swap rate (BBSW) —the basic market rate commercial loans are priced off — has more than doubled from 0.37 percentage points to 0.76 percentage points since late last year.

Dr Lowe noted housing markets had continued to soften and credit growth slow, but not alarmingly.

"This is largely due to reduced demand by investors as the dynamics of the housing market have changed.

"Lending standards are also tighter than they were a few years ago, partly reflecting APRA's earlier supervisory measures to help contain the build-up of risk in household balance sheets.

"There is competition for borrowers of high credit quality."

Economy set to slow

Tomorrow's GDP release is expected to be something of a mixed bag.

Household consumption was stronger than in the March quarter, although judging by the disappointing August retail sales figures it looks to be softening again.

Residential construction should be a solid contributor and net exports should make a small positive impact.

Public sector spending and investment were surprisingly flat, while business investment should be a drag on growth.

Over the quarter, GDP growth is expected to come in at 0.7 per cent, or 2.8 per cent over the year, below the RBA's forecast of 3 per cent in its most recent Statement on Monetary Policy.

On hold through 2019

CBA's Gareth Aird said the expected softer, second-quarter GDP figures won't change the RBA view of the economy, or interest rates.

"The message from the RBA is crystal clear at the moment. Policy is on hold until core inflation and wages growth are on a sustained upward trend," Mr Aird said.

"That looks to be some time away. A move in the cash rate looks a fair way off unless the data materially changes.

"Trends in the labour market — in particular wages and unemployment — and the housing market — in particular credit and prices growth — are the ones to watch currently for policy.

"At this juncture, they are consistent with the cash rate staying on hold until late next year."


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