Less interest-only would be positive development: RBA warns as it holds rates again at April 2017 meeting

At its April meeting today the Board decided to leave the cash rate unchanged at 1.50 percent. They have been unchanged since last August.

The board warned growth in household borrowing, largely to purchase housing, continues to outpace growth in household income.

"By reinforcing strong lending standards, the recently announced supervisory measures should help address the risks associated with high and rising levels of indebtedness. Lenders need to ensure that the serviceability metrics that they use are appropriate for current conditions.

"A reduced reliance on interest-only housing loans in the Australian market would also be a positive development," it noted.

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.

CoreLogic head of research Tim Lawless said it was widely anticipated the Reserve Bank would keep the cash rate on hold, adding the RBA would be loath to push rates lower out of concern for adding further fuel to an already over heated housing market.

"They aren’t likely to push rates higher just to quell housing market exuberance; doing so could push inflation lower and the Australian dollar higher as well as cancel out some of the much needed stimulus that many sectors of the economy are benefitting from," he said.

"On the other hand, the RBA would be loath to push rates lower out of concern for adding further fuel to an already over heated housing market.

"With the cash rate likely to remain on hold, at least for the remainder of the year, it’s looking increasingly like other factors will be necessary to undertake the heavy lifting required to bring about a housing market slowdown. 

"Mortgage rates have been rising despite the steady cash rate, which will act as a disincentive to market demand. 

"The combination of higher mortgage rates, as well as firmer policy settings from APRA around investment lending, more scrutiny from ASIC on lending behaviour and tighter internal lending policies for the banking sector are likely to take some heat out of investment demand. 

"Additionally, market driven factors including high apartment supply, record low rental yields and affordability constraints should gradually contribute to slower housing market conditions. 

"If the housing market continues to accelerate despite these combined factors, there is a very high likelihood of further policy announcements that will more firmly muffle investment demand. 

Importantly, policy makers don’t want to dent investor demand so severely that unit settlements are adversely affected.  With more than 150,000 units currently under construction nationally, much of this new unit supply will be reliant on investor demand to be absorbed. 

"If lending conditions are too strict for this sector of the market, the risk of investors not being able (or willing) to settle will be heightened."

The vast majority (37 of 38) of experts and economists from the finder.com.au RBA survey accurately tipped the cash rate would remain unchanged today.

Some 86 percent of the 36 experts who opted in to this question believing the next rate move will be up; this has risen from 68 percent of panelists last month.

Graham Cooke, Insights Manager at finder.com.au, said out-of-cycle rate hikes have characterised the home loan market in recent months.

“It’s likely that some time will lapse before the Reserve Bank increases the cash rate so banks have taken matters into their own hands," he said.

“This year, out-of-cycle rate increases have become the norm with several banks raising rates for both variable and fixed products."

"When asked about recent out-of-cycle rate hikes, most experts and economists (69 percent) believe these hikes will allow the Reserve Bank to hold off for longer before adjusting the cash rate.

“While recent independent rate rises have been unpopular with homeowners, it’s likely the banks have given the RBA breathing space to hold out longer before making a move.

“We’re expecting the Reserve Bank to stay in it’s ‘wait and see’ mode for the foreseeable future,.

Seven out of 10 experts and economists think Sydney and Melbourne aren’t currently in a property ‘bubble.’

Shane Oliver from AMP Capital said “Yes, the Sydney and Melbourne property markets are overvalued, hot and unsustainable but this does not mean a 20% plus generalised crash is inevitable.”

When experts were asked about the top issues they’d like to see addressed in this year’s budget, housing affordability was the number one issue.

What finder.com.au experts had to say:


Jordan Eliseo, ABC Bullion (Hold): "The RBA has made it clear they are reticent to cut rates further, despite economic conditions that we'd characterise as soft on the whole."

Shane Oliver, AMP Capital (Hold): "Underlying inflation risks staying below target for longer and the Australian Dollar is too high, but growth is ok. National income is rising and the Sydney and Melbourne property markets are too hot. So best to stay on hold."

John Hewson, Australian National University (Hold): "There’s Insufficient evidence of the economy slowing and they’re waiting for the Budget"

Alison Booth, Australian National University (Hold): "I think the RBA will hold the cash rate owing to the stability of the key macroeconomic indicators."

Darryl Gobbett, Baillieu Holst (Hold): "RBA has more concern about the systemic issues with higher debt likely to result from lower interest rates than it sees benefits from lower interest rates."

Richard Robinson, BIS Oxford Economics (Hold) : "Although domestic economy is still weak and the Australian Dollar is tracking too high, the overheating residential property market precludes a cut to rates. A rate cut would help put downward pressure on the Australian dollar.”

Michael Blythe, CBA (Hold): "[Current issues include] low inflation and housing concerns." Savanth Sebastian, CommSec (Hold): "The RBA is comfortable how the economy is evolving.

Rate cuts are not on the agenda and inflation remains contained."

Dr Andrew Wilson, Domain Group (Hold): "No real case for change this month, steady as she goes but economy still needs work - and Budget looming."

Saul Eslake, Economist (Hold): "Notwithstanding the most recent labour force data, which were disappointing, there is no compelling reason for the RBA to think that its most recent forecasts need to be revised down, or that monetary policy settings need to be eased further. On the contrary, the recent renewed strength in property investment lending is a strong argument against further easing - even if it doesn't constitute a case, on its own, for an immediate tightening."

Dr Mark Brimble, Griffith Uni (Hold): "The economy is still struggling to gather momentum with employment weakening and inflation lack luster. Confidence is also below trend. Financial Institutions have also been raise rates out of cycle and thus have increased pressure on the economy."

Peter Haller, Heritage Bank (Hold): "There is nothing in the underlying economic data to justify a change in rates."

Shane Garrett, Housing Industry Association (Hold): "The bank will see no pressing need for an interest rate change at this stage. Economic growth is performing reasonably well in most areas and inflation is not yet a threat."

Alex Joiner, IFM Investors (Hold): "No compelling shift in data or outlook justifies rates being kept on hold."

Robert Montgomery, Infrastructure Partnerships Australia (Hold): "The RBA will wait for more movement in underlying economic indicators."

Michael Witts, ING Bank (Hold): "No drivers have been identified that would suggest that the RBA is looking at changing the absolute level of the cash rate in the immediate period ahead."

Nicholas Gruen, Lateral Economics (Hold): "It's been telegraphed and they don't like changing rates unless they feel obliged to."

Leanne Pilkington, Laing+Simmons (Hold): "Not enough has changed in an economic sense since the RBA met in early March. The main indicators suggest any increase in rates in the near term could put undue pressure on markets and consumers."

Lynne Jordan, Liberty (Hold): "Household debt levels, low wage growth, active property investors and a weak inflationary environment still present a major policy challenge for the RBA. I don’t think we’ll know exactly when the RBA’s next move will be until CPI data comes out at the end of April. If Inflation has gone up, we lean closer towards the rate increase many economists have predicted. But if it is the same or lower, the RBA will likely hold the cash rate and remain in the same predicament it has been for the past few months – that investors will continue to make the most of low interest rates and drive up prices, which could result in household debt levels increasing even further."

Matthew Tiller, LJ Hooker (Hold): "There has been little discernible change[to] economic indicators since the last RBA meeting. GDP has rebounded, inflation remains soft and employment growth has kept ticking over. The east coast housing markets remain strong and continues to be of concern to the RBA, especially when factoring the recent rises in mortgage rates from the majority of banks. These factors combined should see the RBA hold rates steady this month and over the short term."

Stephen Koukoulas, Market Economics (Hold) : "It has an unhealthy emphasis on Sydney and Melbourne housing which is preventing it from cutting interest rates."

John Caelli, ME (Hold): "Risks to house prices outweigh concerns about low inflation in the short term"

Michael Yardney, Metropole Property Strategists (Hold): "Underlying economic growth, though a little better than the previous quarter, is still weak but the RBA can't cut rates because of its concern regarding the strength in the Melbourne and Sydney property markets"

Mark Crosby, Monash University (Hold): "The well telegraphed Fed rate rise is consistent with more normal US growth, and outside Europe and Japan the global environment is reasonably benign. The case for a rate rise is not yet strong enough to justify moving rates up, but further Fed rises later this year should lead the RBA to consider increasing rates in H2."

Emily Dabbs, Moody's Analytics (Hold): "Inflation pressures are starting to build, but the domestic demand remains constrained by high underemployment. The central bank is keeping a close watch on the hot housing property, and further easing is unlikely while household debt continues to grow strongly. "

Jessica Darnbrough, Mortgage Choice (Hold): "I think the Reserve Bank will once again take a wait and see approach to interest rates. At present, there is nothing in the global or domestic economies that would push the Board to change their current stance on monetary policy. "

Christopher Schade, MyState Bank (Hold): "The hurdle for another cut is high. While inflation remains subdued, and the outlook for economic growth over the next year couple of years slightly below trend, interest rate settings in Australia are very accommodative and remain appropriate at their current level."

Alan Oster, NAB (Hold): "[The RBA is] still watching."

Jonathan Chancellor, Property Observer (Hold): "No need for any decision but hold. This year has seen continued upwards pressure on Sydney and Melbourne house prices, but standby for a shift given the continued regulatory measures and out of cycle bank rate hikes."

Matthew Peter, QIC (Hold): "The hot state of the housing market will keep the RBA from cutting rates, while the tepid recovery in the economy and lack of wage growth and core inflation will keep the RBA from raising rates - RBA on hold through 2017 and the first half of 2018."

Noel Whittaker, QUT (Hold): "No reason to move either way."

Janu Chan, St.George Banking Group (Increase): "The RBA is needing to balance a mixed outlook for the domestic economy and risks in the housing market. It suggests that the RBA will likely remain on hold in coming months."

Steven Milch, Suncorp (Hold): "Low inflation is being balanced by sound growth and a buoyant property market."

Brian Parker, Sunsuper (Hold): "Little change in the growth or inflation outlook from the previous meeting."

Clement Tisdell, UQ-School of Economics (Hold): "No indication from the governor of the Bank of a change."

Nicki Hutley, Urbis (Hold): "RBA does not want to exacerbate house price growth." Bill Evans, Westpac (Hold)

Christine, Williams (Hold): "[The] employment rate has stayed the same with a mixture of casual and part time work employment No new full time work offered. Resources have not increased. With Cyclone Debbie's aftermath and the expectation of food rice increases this would not be the month to increase rates."