The RBA has held the official cash rate at 1.5% for 13 months. Looking at the data and economic headwinds we see no compelling evidence for change anytime soon.

The combined strain of Australia’s slowest annual wage growth for a generation in addition to higher power bills, mean a rate rise could tip many household in to dangerous mortgage stress territory. As to the vexed question of why wages have grown so slowly RBA Governor, Phillip Lowe, theorises that the mix of emerging technologies replacing jobs and more intense international competition for labour has eroded people’s confidence to ask for a pay rise.

Record household debt means Australians owe $2 for every $1 they earn. Reduced discretionary spending is a major problem, given consumption makes up over half the country’s GDP. A rate rise would force job losses in retail causing economy-wide impacts that are all downside.

Finally, higher rates almost always sends the AUD higher which raises the costs of our exports. Since early 2016, the AUD is up 10c to nearly 80c, with CBA forecasting 85c for next year. When the US Federal Reserve (their RBA) began raising rates, the AUD’s value was expected to drop, but the opposite happened. Three main reasons for this are: the unlikelihood of the Trump administration achieving its planned infrastructure spree, tax cuts and deregulation; ongoing tension on the Korean Peninsula; and the aftermath of Hurricane Irma. The RBA needs to see the AUD around 70c or lower, in order to lift global competitiveness, boost national income and inject much needed inflationary pressure. To quote Dr. Lowe, “an appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast”. In other words, the RBA will probably hold off for now.

With the RBA on hold and interest rates likely to stay lower for longer, surely this bodes well for the residential property market? To a degree, yes. With the cash rate at record lows, new entrants are attracted to the market. In turn, this increases demand leading to rising property values as we have seen over recent years. It is worth highlighting that low interest rates (and consumer demand) are but one factor that influence property prices. Supply, or the lack thereof, is another.


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