Cash rate on hold but not for long as RBA flags interest rate hike


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The RBA has left the cash rate on hold at 1.5% for the 17th consecutive meeting.

The controlled slowdown in housing markets, driven by subtle falls across Sydney and Melbourne, have eased pressure on the RBA to lift rates in order to quell housing market exuberance.

Higher on the RBA Board's agenda is likely to be inflation and employment.

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Year ended inflation averaged just 1.9% over 2017, and the unemployment rate was 5.5% in January, up from 5.4% in November last year.

Continued low wages growth (2.1%), and the outlook for the Australian dollar and commodity prices will also be important considerations.

A soft landing for the housing market, which appears to be underway, is likely to be a very welcome outcome from the RBA.

We have macroprudential policies to thank for softer housing market conditions; investment activity has reduced and lending policies are firmer.

The bi-product has been weaker market conditions in the cities where investment activity has been concentrated: Sydney, and to a lesser extent, Melbourne.

Dwelling values in Sydney have reduced by 3.7% since peaking in July last year and Melbourne vales are 0.4% lower since peaking in November.

Despite the hold decision from the RBA, mortgage rates remain close to historic lows, particularly for owner occupiers who are paying down both their interest and principal.

Investors are facing a mortgage rate premium of around 60 basis points, but relative to long term averages, their mortgage rates are low.

While the RBA has flagged the next move in interest rates will be a rise, it remains likely that any hike to the cash rate is well in the future.

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Tim Lawless is head of research at CoreLogic Asia Pacific.