RBA surprises industry with cash rate change

For the first time in 15 months, the RBA decided to change the cash rate from its record low of 1.5 per cent.

The new cash rate for December is now 1.75 per cent

Few commentators anticipated this result; every participant on the finder.com.au panel predicted that the rate to hold, brokers responding to the monthly HashChing survey were largely expecting no change (91.3 per cent), while RateCity’s analysis of 24 economic indicators suggested there would be a slow-moving economy which would be unlikely to change anytime soon.

Mortgage Choice’s John Flavell said he was “somewhat surprised” at the decision to raise the cash rate, as he expected rates to hold until 2018.

He said: “In recent months, there has been plenty of signs to suggest an increase in the official cash rate [isn’t] too far away.

“The Australian economy has been performing incredibly well, with the unemployment rate falling, business conditions improving, and home loan demand remaining strong. Yet, despite these economic improvements, most economists had thought a rate increase wouldn’t occur until at least 2018.

“Looking ahead, I think we can expect to see more rate increases throughout 2018. That said, interest rates will not run away at breakneck speed. Rather, we will likely see a slow and steady increase in rates.”

RateCity’s Sally Tindall was also anticipating a hold this month, but predicted a rate rise before the end of 2018.

“While we won’t see a rate hike in the short term, if inflation starts to grow in the first half of next year, we may see a tightening of monetary policy before 2018 is out,” she said.

Likewise, AMP economist Shane Oliver also predicted a rate hike on the horizon, but not this soon.

“Strong business conditions, strong employment and the RBA’s own expectations for stronger growth point to an eventual rate hike but low inflation, record low wages growth, the slowing housing cycle, uncertainty around consumer spending and the still too high [Australian dollar] argue for flat or even lower rates,” Mr Oliver said.

CoreLogic's head of research Tim Lawless had warned against raising the cash rate, as it could impact economic growth.

Mr Lawless commented: “Considering the record levels of household debt, most of which is concentrated within residential mortgages, higher interest rates will test household balance sheets, which are already thinly stretched." 

“Households are already clamping down on spending which is evident in the weak retail spending figures occurring against a backdrop of record low wages growth.

“At this point it is highly likely that an increase in the cash rate, and subsequent rise in mortgage rates would further dampen household consumption, which in turn would likely lead to slower economic growth.” 

Meanwhile, the Housing Industry Association’s Shane Garrett claimed Australia needed interest rates to stay at their current level.

“General inflationary pressures are well under control – but several components of demand are below par and need a supportive interest rate backdrop,” Mr Garrett said.

[Related: RBA holds cash rate at record low]