The Reserve Bank of Australia opted to keep the official cash rate at a record-low 2.5% for the eighth consecutive month – but many commentators believe the board will not be able to dither much longer.
Dwelling values were up 2.3% in March, but while the headline growth rate is very high, it is really Sydney – which had a 15% spike in 12 months – and Melbourne which are responsible for driving such high capital gains.
“It’s not just the pace of capital gains that will be causing some concern to the Reserve Bank, but also the amount of investment in the housing market…the last time investment activity was so strong was just before the housing boom peaked back in 2003,” said RP Data research head
Tim Lawless.
He believes the
RBA board will have to raise the official cash rate in coming months.
“If value growth continues along the current trajectory through I think the Reserve Bank will be forced to take action to quell the level of exuberance via higher interest rates.”
This view is shared by Digital Financial Analytics principal Martin North, who thinks the RBA is “stuck in the middle”.
“To get good growth we need business investment to flourish. Inflating house prices is not a substitute. To ease the over-stoked property market we need rates up at least 1% – despite the damage to householders who took maximum mortgages out when rates were rock bottom,” he said.
“We are, as they say between a rock and a hard place. Time for some action, not sitting on hands.”
The TD Securities Melbourne Institute monthly inflation gauge rose by 0.2% in March and by 2.7% in the 12 months to March, a similar pace to February.
TD Securities head of Asia-Pacific research Annette Beacher said the RBA could begin tightening later in the year as inflationary pressure grows.
"We see the August monetary policy testimony as the perfect timing to announce that emergency cash rates are no longer required, paving the way for at least one small upward adjustment by year end.”
However, some commentators disagree the RBA needs to shift the cash rate upwards.
Housing Industry Association senior economist Shane Garrett said as the Australian economy is growing below trend and the unemployment rate has recently broken the 6% threshold, the maintenance of low interest rates is extremely important.
“It is vital that low interest rates remain, so as to ensure that the housing recovery reaches its full potential…Continued low interest rates will improve the chances of a more competitive dollar eventually coming about,” he said.
Mortgage Choice spokesperson
Jessica Darnbrough pointed to recent positive statistics such as loans to finance new home construction surging 5.8% in January, and encouraged potential home buyers to capitalise on the buoyant market conditions.
“With all of this positive data floating around, it really isn't surprising to see the Reserve Bank leave the cash rate on hold. In fact, the RBA is now widely expected to leave the cash rate on hold for the foreseeable future.”
Finder.com.au spokeswoman Michelle Hutchison encouraged borrowers to switch to variable home loan rates while the cash rate remained low.
There were almost 200,000 borrowers who refinanced their home loans in the past 12 months to January, according to the Australian Bureau of Statistics.
“We're urging more borrowers to use this opportunity with the rate pause to consider switching their home loan to get ahead of their repayments before rates start to rise,” Hutchison said.
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'Little comfort' for RBA, say economists
Rates still don't budge
Regional banks want level playing field
