The RBA decided yesterday to maintain the cash rate setting of 2.50%. The RBA has now been on hold since the last rate cut in August 2013 and remains in “wait and watch” mode.

The decision was expected by markets given the RBA has continued its rhetoric regarding a period of stability in rates. Specifically mentioned in the RBA’s announcement was slightly firmer consumer demand over the summer and solid prospects of an expansion in housing construction. Some indicators of business conditions and confidence have improved from a year ago and exports are rising. But at the same time, resources sector investment spending is set to decline significantly and, at this stage, signs of improvement in investment intentions in other sectors are only tentative, as firms wait for more evidence of improved conditions before committing to expansion plans. Government spending is expected to be subdued.

The RBA made specific mention of dwelling prices having increased significantly over the past year. They also pointed to the assistance provided to the underlying economy by the fall in the Aussie dollar since last year, but cautioned that the recent rise since the beginning of the year is concerning.

Whilst the RBA is continuing with its easing bias, this now translates into maintaining lower rates for longer, rather than any further rate cuts. Looking ahead, continued accommodative monetary policy should provide support to demand, and help growth to strengthen over time. Inflation is expected to be consistent with the 2–3 per cent target over the next two years assisted by the low demand for labour anaemic growth in wages

. Given current economic and market conditions, we believe the RBA will be on hold for an extended period of time as they have clearly indicated their preference for a period of stability in interest rates as the economy grows below trend and re-adjusts to the end of the boom in mining sector investment spending. We expect increased rhetoric from the RBA regarding the housing market if house prices continue to rise at their current pace.

 

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