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‘No strong case’ for adjustment to monetary policy

rba rba
Reporter 7 minute read

The board of the Reserve Bank of Australia has said that there is no “strong case” for a near-term adjustment in monetary policy, instead arguing that it would be “appropriate to hold the cash rate steady”.

According to the minutes of the monetary policy meeting of the Reserve Bank board, released on Tuesday (21 August), members assessed that the current stance of monetary policy would “continue to support economic growth and allow further progress to be made in reducing the unemployment rate and returning inflation towards the midpoint of the target”.

Elaborating the decision behind the reasoning to keep the official cash rate at its record low level of 1.5 per cent for August, the minutes read: “In these circumstances, members continued to agree that the next move in the cash rate would more likely be an increase than a decrease.

“However, since progress on unemployment and inflation was likely to be gradual, they also agreed there was no strong case for a near-term adjustment in monetary policy.


“Rather, members assessed that it would be appropriate to hold the cash rate steady and for the bank to be a source of stability and confidence while this progress unfolds.”

The minutes continued: “Taking account of the available information, the board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.”

Dwelling investment “will not contribute to growth”

The board also noted trends in the housing markets, particularly that prices in Sydney and Melbourne had declined further in July and across a broader range of properties and that prices had also declined in Perth.

It noted that prices had increased in Hobart and been relatively stable in Adelaide and Canberra, while rental vacancy rates had been “little changed” in Sydney and Brisbane, and had continued to fall in Melbourne, where strong population growth had continued to outpace additions to the rental stock.


The minutes read: “Despite the easing of conditions in the established housing market, dwelling investment was expected to remain at a high level, but not to contribute to growth, over the coming quarters.

“Residential building approvals had trended lower, which was consistent with information from liaison contacts that there had been a decline in off-the-plan sales of apartments.

“Nevertheless, a significant pipeline of work remained to be done, particularly in Sydney and Melbourne. Liaison contacts had continued to report that capacity constraints had been limiting the pace at which the pipeline could be worked through, particularly in Sydney.”

Relationship between the cash rate and mortgage rates

Speaking earlier this month, CoreLogic’s head of research, Tim Lawless, noted that while the cash rate has remained stable for the past two years, mortgage rates have been “tweaked”.

“Over the same period of cash rate stability, the average standard variable mortgage rate has actually reduced by 5 basis points for owner-occupiers and increased by 30 basis points for investors. Three-year fixed rates for investors have increased by 10 basis points and discounted variable rates are up by 40 basis points for investment loans.

“Additional mortgage rate premiums are payable for borrowers who aren’t paying down their principal. Clearly, the stability in the cash rate hides a deepening complexity in mortgage products brought about by the heightened level of regulation and focus from both lenders and policymakers on improving credit quality.”

Paul Dales from Capital Economics added that credit policy and pricing changes from lenders would prolong cash rate inertia.

“The RBA is increasingly worried that financial conditions will be tightened by banks raising their mortgage rates and using stricter credit criteria, so it will keep interest rates at 1.5 per cent so as not to make things worse,” Mr Dales said.

Despite also predicting a hold, economist at Market Economics Stephen Koukoulas urged the central bank to cut rates.

“The RBA will hold rates because it continues to place a higher priority on reducing house prices than meeting its inflation target and tackling the slack in the labour market,” Mr Koukoulas said. “It should be cutting interest rates.”

[Related: RBA reveals August cash rate]

‘No strong case’ for adjustment to monetary policy
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