The Reserve Bank of Australia (RBA) have traditionally altered the official cash rate on Melbourne Cup day. But, this year ‘Rate Rise’ has been scratched.
In years prior, the RBA has either raised or dropped the official cash rate at its November board meeting. In fact, five out of eight Novemeber meetings have witnessed changed. This year however, no change occurred.
Economists say that while the RBA is tempted to increase rates to rein in a housing boom that is beginning to take hold, they are also keen to leave the interest rate at a low rate until economic growth reaches above trend.
At present, economists are suggesting that no rate rise will occur in 2014, and that 2015 will be the year for change. Some economists are saying that we’ll see a rate hike in the early months of 2015, while others are suggesting that this won’t occur until the closing months of that year.
The record low cash rate is encouraging investors to buy property. New home construction first-home buyer grants are also creating a boom in new home building. This trend is expected to strengthen as mining construction comes to a close. However, some economists are fearful that the low cash rate may increase the chances of housing prices becoming misaligned with the economy.
The Reserve Bank governor, Glenn Stevens, has also voiced his concern about the rapid rise in investment loans in the housing sector. These types of loans, says Stevens, push-up the prices for owner-occupiers and also for first-home buyers, which, in turn, reduces housing affordability.
This surge in property investment buying has urged the RBA to work with the Australian Prudential Authority (APRA) and to introduce new regulations which will cap home prices in Sydney and Melbourne. These new regulations will then enable the RBA to keep the official cash rate on hold until 2015.
Additional factors that are driving this stay on interest rates include the lower Australian dollar and the transition of the Australian economy to one that is not fuelled by mining investment.
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Written by eChoice