There were only a few changes of note in last week’s RBA statement following their board meeting where (as expected) rates were unchanged. The 1.5% cash rate has been unchanged since the 25 basis point cut at the August 2016 board meeting. There have however been some substantive developments over the past month, most notably: continued improvement in the global economy; a decent rebound in the Australian economy in the December quarter; further weakness in wages despite this recovery; and an acceleration in house prices in Sydney and Melbourne.
There is little in the way of wage and inflationary pressures and underlying inflation is expected to remain below the RBA’s target until late 2018. However, over the past few months, RBA Governor Philip Lowe has expressed some discomfort with the prospect of household debt rising further. He has also acknowledged that conditions are strong in the housing markets in Sydney and Melbourne and mentioned that, with regard to potential monetary policy scenarios, “a period of stability of interest rates..…is quite a reasonable one” .
These factors mean the cash rate is unlikely to move any lower, with most economists still predicting the cash rate will remain on hold at 1.5% for an extended period.
Current futures pricing of the cash rate