‘Conflicting economic trends’ force RBA's cash rate call

One of Australia’s most respected economists has weighed in on the Reserve Bank of Australia’s decision to keep the official interest rate unchanged at yesterday’s monthly board meeting.

CoreLogic head of research Tim Lawless says the call to keep the cash rate on hold at the historic low of 1.75 per cent comes as the RBA faces “conflicting economic trends”.

“On one hand, we have an economy that is growing at just over 3.0 per cent per annum, low unemployment and a re-accelerating housing market,” Mr Lawless said.

“On the other hand, the RBA is confronted with a core inflation reading which is at a record low as well as the lowest wages growth on record.”

Mr Lawless said while the decision to hold rates was widely expected, the likelihood of a further rate cut later this year remains on the cards.

“If the June quarter inflation data, which is out a week before the RBA’s August board meeting, provides another weak reading, the chances of a rate cut in August are high,” he said.

“The turnaround in the pace of capital gains across the housing sector is likely to be a concern for the RBA.”

Mr Lawless noted that new CoreLogic data has revealed a 1.6 per cent rise in capital city home values last week, following a 1.7 per cent rise in April.

“The stronger housing market conditions have been enough to re-inflate the trend rate of growth which is something the RBA and the banking sector regulator are likely to be keeping a close eye on,” he said.

“Strong housing market conditions probably wouldn’t be enough to block a further rate cut, however ... if the renewed growth trend continues, there is the potential for a further regulatory response that could cool housing market demand while at the same time allowing monetary policy to stimulate the broader economy.”

[Related: 'Ingredients in place for Australian housing crash']

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Emma Ryan

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