Despite some market anticipation around a potential rate cut today, the RBA has kept the cash rate on hold.
The cash rate has remained at a record low of 1.5% for 32 consecutive months.
Arguments for the bank to cut rates ahead of the Federal election later this month were largely centred on Australia’s very low underlying inflation rate of 1.6% which is current below policy targets.
“Inflation targeting” traditionally has been motivated by a need to set some stability in expectation for consumers and businesses.
But on this point, RBA noted that the labour market remains strong, with a national unemployment rate trending at 5%. This is considered ‘full employment’ and would likely assist with upward pressure on inflation.
“The unemployment rate has been broadly steady at around 5 per cent over this time and is expected to remain around this level over the next year or so, before declining a little to 4.75% in 2021,” said RBA Governor, Philip Lowe.
Governor Lowe said that he expects inflation to be within the range of 2 to 3% by 2020.
Rate cuts or lower unemployment – which would you prefer?
Although the cash rate remains on hold today, many analysts are tipping a rate cut to come soon, and some suggest two cuts are likely before the end of the year.
If this were to occur, it is expected the Sydney and Melbourne housing markets would stabilise faster, and obviously affordability would increase across the country – that is, providing the banks pass on the full interest rate cuts to customers.
However, insights from Mr Lowe suggest that future rate cuts would be dependent on the outcome of the labour markets. If the unemployment rate were to drop further, the argument for a cash rate cut would decrease.
“These insights from Mr Lowe are telling, and ultimately good news despite the cash rate remaining unchanged. The RBA is monitoring the unemployment rate very closely, and any further decreases would be a positive indicator for the economy and lead to potential wages growth in the future. On the other hand, if the unemployment rate does not decrease there is an argument, and room for further rate cuts. Both scenarios have positive impacts.” said Ironfish Head of Property William Mitchell.
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