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The Australian Interest Rate Outlook (Melbourne Cup Day Update)

Article By Adam Camac | | Financial Planning

For the second Melbourne Cup in a row, the Reserve Bank of Australia has kept the official cash rate unchanged, with the cash rate at 1.5 per cent for a 14th straight month. The outlook for the cash rate is anticipated to remain unchanged until at least the second half of 2018.

Currently the RBA remains caught in a difficult balancing act. The RBA needs to cool housing market conditions and would generally do this by raising interest rates, increasing loan repayments and reducing the incentive to bid up house prices or purchase investment properties. Additionally, employment has been rising in all states, and more people who had previously given up on looking for employment have now re-joined the search and been finding employment. With higher employment levels, historically this would lead to more people with higher incomes spending (or purchasing houses) at a greater level or being able to absurd the hit of higher home loan repayments.

This time around, whilst employment is strong, this has yet to result in an increase to wages, with overall household income growing slowly and debt levels remaining high. Whilst the economy is positive, it is not growing as strongly as expected. As a result, if the RBA were to increase interest rates it could reduce the level of spending by Australian households, with the flow on effect of slowing the level of economic growth. A further difficulty is that because household debt levels are so high, with any increase to interest rates, the impact on household spending is considerably greater.

However, the RBA has had some reprieve, rather than having to increase interest rates broadly, lending requirements for banks for investment properties or suburbs with a glut of newly built apartments now face tougher restrictions and/or higher lending rates. This has helped ease market conditions in the last few months (particularly in Melbourne and Sydney). Furthermore, inflation remains low outside of specific areas such as housing or electricity costs, therefore the RBA does not currently need to increase rates to keep inflation under control.

Economic growth and business confidence remains positive, until wage growth and inflation begin to notably pick up from their current levels, and the housing market continues to ease through other policy methods, the RBA can afford to leave cash rates at their current historical lows for some time longer. As a result, whilst these abovementioned conditions continue to remain in place, cash rates are not anticipated to change.

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