The Reserve Bank of Australia (RBA) announced on Tuesday that it is leaving the nation’s official cash rate on hold at 1.50%, marking two years of the record low rate.

While some were urging the RBA board to issue a change, Mortgage Choice Chief Executive Officer Susan Mitchell noted numerous factors that might have influenced the central bank’s decision to keep the official rate as is for a sustained period.

First, there was the vulnerability of overly indebted households and economic shocks. The RBA is concerned how a change in interest rates may impact households’ disposable incomes.

Second, the consistent decline in home prices across the country for the past three months has caught the attention of the central bank, and it believes that an increase to the cash rate could put further pressure on the nation’s housing market. In fact, the latest data from CoreLogic suggested that the decrease in dwelling values, caused by long-term falls in Perth and Darwin, as well as the two largest housing markets (Sydney and Melbourne), may be gaining momentum.

Mitchell also pointed out that the recent Consumer Price Index for the June quarter did not meet market expectations and was below the RBA’s target range, rising 0.4% on the previous quarter and 2.1% annually.

Meanwhile, economists identified data on consumer and business sentiment, and business conditions across industries as some of the other reasons behind RBA’s decision.

“The most recent Quarterly Business Survey from the National Australia Bank found that favourable business conditions continue and point to business investment growth. High commodity prices are resulting in favourable conditions in the mining sector, however business confidence is just above average, where it has been for some time,” said Mitchell.

Consumer sentiment does have a significant impact on the economy, however, and currently it sits below the long-term average. This is a result of the continuous pressure being felt by consumers brought about by weak wages, rising electricity and petrol prices, and falling dwelling values.

Lastly, the national unemployment rate is also a key factor in RBA board’s monetary policy decisions. According to the latest Labour Force Survey from the Australian Bureau of Statistics, it is now at 5.4%.

CoreLogic head of research Tim Lawless shared the same point of view, saying that the steady rate had a lot to do with the slack labour market. Aside from this, he also cited stubbornly low inflation, record high household debt, and falling dwelling values as key drivers of the rate going unchanged.                                                                                       

Lawless also said that financial markets continue to expect that the cash rate will remain unchanged until at least January 2020.

Mitchell agrees, and expects the cash rate to remain steady for the “foreseeable future.”

“My view is that raising or cutting the rate at present could have negative ramifications to the growth of the economy and may place undue pressure on family finances,” she said.

The current market condition does open up a lot of opportunities for valuable acquisitions. “Despite the complexity in the lending environment, prospective buyers could benefit from softening property prices and the lowest mortgage rate in decades, which makes now a great time to buy,” Mitchell said.

 

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