THE Reserve Bank has left the official cash rate on hold at its record low of 1.5 per cent, marking one year since the last move.
The RBA last cut the cash rate in August 2016, following an earlier cut to 1.75 per cent in May. There has not been an official cash rate increase since November 2010.
The decision to hold comes a week after a surprise low inflation reading, with the consumer price index rising 0.2 per cent in the June quarter, missing expectations for a 0.4 per cent increase.
That dragged the headline inflation rate for the year to June 30 to 1.9 per cent, below the RBA’s target band of 2-3 per cent.
While prices fell in several sectors during the quarter, including transport, recreation and culture, and communication, economists singled out the decline in food prices as the major contributor to the lower number.
In his statement, RBA Governor Philip Lowe said the recent inflation data was “broadly as the bank expected”. “Both CPI inflation and measures of underlying inflation are running at a little under 2 per cent,” he said.
“Inflation is expected to pick up gradually as the economy strengthens. Higher prices for electricity and tobacco are expected to boost CPI inflation. A factor working in the other direction is increased competition from new entrants in the retail industry.”
CoreLogic head of research Tim Lawless said with headline inflation tracking below the target range, labour markets tightening and the economy continuing to grow, the “chances of a rate cut appear to have diminished”.
“However, rate hikes may be some way off as well,” he said. “Recent declines in the US dollar and strengthening commodity prices have placed added pressure on the Australian dollar, which may reduce export demand.”
Mr Lawless said financial markets were betting on an official cash rate hike some time in late 2018. “CoreLogic’s home value index showed a strong capital gain result in June and July, however the trend rate of growth suggests that the hottest markets, Sydney and Melbourne, have lost some steam after the first quarter of 2017,” he said.
“While the cash rate remained on hold, mortgage rates have been edging higher since late last year, particularly for investors and interest only loans. Higher mortgage rates against a backdrop of record high household debt levels and record low rental yields are gradually taking some heat out of the housing market.”
According to a survey of 35 economists and experts by comparison website Finder.com.au, two thirds believe there will be up to three rate hikes in the next two years. “Don’t go into panic mode,” said Finder.com.au insights manager Graham Cooke.
“All you can do is prepare for the rate hikes by finetuning your household budget and identifying areas where you can trim your outgoings.”
It comes after a study by ME Bank found the rising cost of necessities such as electricity, combined with stagnating wage growth and the potential for mortgage rate rises, were causing increased financial stress among households.