Shane Oliver predicts RBA to leave interest rates on hold

AMP Capital Markets chief economist Shane Oliver expects the Reserve Bank to leave interest rates on hold today, with some positives – such as HIA figures showing an improvement in the housing market and in new home sales - pointing to a rise in market confidence.

"There are signs the jobs market might be bottoming out, yet CPI inflation figures are a bit higher than expected - although they are in the mid-point of the target range," he said.

"There’s not enough evidence for a cut so the reserve will sit on its hands next week. It’s more likely we’ve seen the bottom of the rate cuts cycle and, in a year’s time, we may be going the other way. The housing industry is a good bellwether for all this and, with it rising, the scene looks a whole lot better."

Oliver said variable interest rates took their lead from the cash rate whereas fixed rates were affected by other factors, such as Commonwealth government bonds, which have been rising over the past year to just over 4% now. This has increased the banks’ long-term borrowing costs.

He said it was always the case that historically low interest rates "were never going to be sustained". As long term bond rates go up, banks lending at fixed rates over, say, three years would be faced with the prospect of being caught by a rise in the official cash rate, pushing up interest rates and making their loans unprofitable.

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