RBA tipped to hold rates today

The Reserve Bank is likely to keep the official cost of borrowing at its record low of 1.5 per cent when it meets today, according to a chief economist and a property industry executive.

Speaking to The Adviser, AMP Capital chief economist Shane Oliver said that the RBA is likely to continue doing what they’ve done since September last year and leave rates on hold today.

Mr Oliver argued that the macro-economic arguments in Australia “haven’t changed much”.

“We've got inflation running below target and underlying inflation is likely to remain below target for longer than the Reserve Bank is allowing for. We've got the Australian dollar which is too high, and unemployment is higher than we'd like it to be,” he said.

“So all of those arguments are still there for a rate cut, but against that there are more powerful arguments and they are that growth is OK,” he countered, highlighting that December quarter GDP growth “bounced back”, and national income has increased on the back of higher commodity prices.

However, he noted that Sydney and Melbourne property prices are “perhaps too hot for comfort”.

“The arguments against a rate cut dominate at the moment, and by the same token, it's hard to argue in favour of a rate hike, because although the Sydney and Melbourne property markets are too hot, other property markets around Australia are seeing moderate growth or are actually quite weak in the case of Perth.

“And then the low inflation story and high unemployment sort of argue against a rate hike, so the best outcome is to leave rates on hold, which I think is what they'll do,” he concluded.

Mr Oliver went on to say that he believes a rate hike is unlikely this year. “It’s probably a second half of 2018 story,” he said.

“It’s at least a year away, because it's going to take a while for inflation on an underlying basis to rise. It's going to take a while for wages growth to pick up from record lows. We've still got 14 per cent of the population, 14 per cent of the workforce either unemployed or underemployed, which is actually quite a high number.

“We've still got relatively subdued economic growth, and raising interest rates just to handle the Sydney and Melbourne property markets, just two property markets, would be madness in that environment.”

CoreLogic executive general manager banking and finance Craig Mackenzie agreed that RBA is likely to leave the cash rate untouched today.

“I think rates being on hold would be the most likely,” he told Mortgage Business.

“I certainly can't see them reducing rates given the macro-economic concern that the RBA has around house prices, and the downside risk were we to see a correction in house prices, from a broader economic activity perspective… I would be surmise that rates being on hold would be the most likely outcome.”

Similarly, almost 92 per cent of brokers surveyed by HashChing believe that the RBA will keep the rate on hold today.

[Related: CPI tipped to lift to 2%]

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Francesca Krakue

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