Cash rate on hold as RBA stuck between rock and hard place


The Reserve Bank of Australia seems to be stuck between a rock and a hard place, today announcing it has left the cash rate on hold at the record low setting of 1.5% in a widely anticipated decision.

The RBA isn't likely to push rates higher just to quell housing market exuberance; doing so could push inflation lower and the Australian dollar higher as well as cancel out some of the much needed stimulus from which many sectors of the economy are benefiting.

On the other hand, it would be loath to push rates lower out of concern for adding further fuel to an already over-heated housing market.

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With the cash rate likely to remain on hold, at least for the remainder of the year, it's looking increasingly like other factors will be necessary to undertake the heavy lifting required to bring about a housing market slowdown.

Mortgage rates have been rising despite the steady cash rate, which will act as a disincentive to market demand.

The combination of higher mortgage rates, as well as firmer policy settings from APRA around investment lending, more scrutiny from ASIC on lending behaviour and tighter internal lending policies for the banking sector are likely to take some heat out of investment demand.

Additionally, market driven factors including high apartment supply, record low rental yields and affordability constraints should gradually contribute to slower housing market conditions.

If the housing market continues to accelerate despite these combined factors, there is a very high likelihood of further policy announcements that will more firmly muffle investment demand.

Importantly, policy makers don't want to dent investor demand so severely that unit settlements are adversely affected.

With more than 150,000 units currently under construction nationally, much of this new unit supply will be reliant on investor demand to be absorbed.

If lending conditions are too strict for this sector of the market, the risk of investors not being able (or willing) to settle will be heightened.


Tim Lawless is head of research at CoreLogic Asia Pacific.
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