Finance Finance News RBA keeps interest rates on hold at historic low

RBA keeps interest rates on hold at historic low

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The Reserve Bank of Australia has left interest rates on hold at a 60 year low, amid tentative signs of life in the non-mining economy but despite concerns that house prices are rising at an unsustainable level.

The central bank announced this afternoon that the official cash rate would remain unchanged at 2.5 per cent for the eighth month in a row, following indications that the low cost of borrowing is supporting consumer spending, housing construction, business confidence and other economic indicators.

The news came as a private sector survey showed that capital city house prices jumped 10.6 per cent in the year to March, fuelling growing fears that buyers are leaping into the residential property market while interest rates on mortgages remain well below long-term trends.

Economists were unanimous in their expectation that the central bank would keep the cash rate at the same level as it has been since August, following recent comments from RBA Governor Glenn Stevens signalling that interest rates will remain on hold for the time being.

It was position Governor Stevens reiterated in his statement accompanying the RBA’s latest interest rate decision, commenting that “continued accommodative monetary policy should provide support to demand and help growth to strengthen over time”.

“In the board’s judgment, monetary policy is appropriately configured to foster sustainable growth in demand and inflation outcomes consistent with the target,” he said.

“On present indications, the most prudent course is likely to be a period of stability in interest rates.”

But there are growing expectations that the RBA will raise interest rates late this year or early next, amid early indications that the Australian economy is gathering momentum.

A survey of 13 economists conducted by newswire AAP showed that four of the respondents expected the RBA’s first rate hike to occur in late 2014, while nine were predicting one or more increases in the first half of 2015.

Only two of the economists surveyed expected another cut in the cash rate.

Adding to evidence that the next move in interest rates will be upward, RP Data Rismark’s Home Value Index showed that capital city home values jumped 2.3 per cent in March after a flat result the previous month.

RP Data research director Tim Lawless said that half of all capital cities – Sydney, Melbourne, Perth and Canberra – were now posting record high prices.

“Over the long-term, I don’t believe that such a strong pace of growth can be sustained,” he said.

Sydney, which led the capital cities in terms of house price growth, has posted a 15.6 per cent increase in residential property prices in the past 12 months.

JP Morgan economist Ben Jarman said that Governor Stevens’ statement was little changed from a month ago, but did suggest that the RBA is concerned about the recent improvement in the value of the Australian dollar.

“There is a bit of acknowledgement that the currency is not doing quite what it would like,” he said.

“That’s a space to watch: If it keeps going up, they’ll have to start [talking it down] again.”

The Australian dollar fell slightly after the RBA’s decision, trading at 92.71 cents in the minutes after the announcement.