In its Australian Macro Weekly analysis, ANZ predicted that the Reserve Bank will leave the official cash rate untouched at 1.5 per cent when it meets today for the first time this year.
“We do not expect any meaningful changes to the statement from the previous one,” ANZ said of the RBA’s statement of monetary policy.
ANZ added that “persistently” low inflation means the RBA is likely to retain its easing bias, however signs of wage inflation along with a “sharp” improvement in commodity prices are likely to stay the RBA’s hand for some time.
“While there remains some risk of further rate cuts, we expect that the RBA will maintain the cash rate at 1.5 per cent over our forecast horizon,” ANZ said.
“Financial stability concerns also remain an important counterbalance to weak inflation. House prices continue to grow strongly, especially in Sydney and Melbourne, driven largely by investor lending, suggesting that further rate cuts are unlikely.”
ANZ head of Australian economics Felicity Emmett elaborated that the ongoing strength in house prices is, in ANZ’s view, a key reason behind the RBA’s reluctance to cut rates.
“This week’s data showed very strong gains in house prices, particularly in Sydney and Melbourne, while the credit data highlighted that investor lending continues to drive the housing market,” she said. “With household debt high by historical standards, this counts against further rate cuts.”
Further, an improvement in business conditions will give the RBA some comfort that growth remains solid despite the weak Q3 GDP outcome and will eventually return inside the target band, according to ANZ.
“The bounce in business conditions was particularly encouraging,” Ms Emmett commented. “The relatively broad-based nature of the gains, with strength across most of the sub-components as well as the state indices, suggests that the underlying fundamentals of the economy remain solid.”
ANZ concluded that while it expects the RBA to hold rates at 1.5 per cent today, its accompanying statement and Statement of Monetary Policy is likely to provide an update on the RBA’s current assessment of the economy.
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