Cash rate hold means a wait-and-see approach to the market

STEADY dwelling-value growth combined with a strong rebound in consumer confidence has encouraged the Reserve Bank of Australia to leave the cash rate on hold.

At Tuesday's board meeting, the RBA judged it was prudent to leave the cash rate alone this month following last month's decision to cut the cash rate to the historical low of 2.25%.

"When the reserve bank cut the cash rate last month, many of Australia's lenders followed suit, passing on the full rate cut to their borrowers," Mortgage Choice spokeswoman Jessica Darnbrough said.

"These rate cuts are only just now starting to come into effect, so the reserve bank has obviously decided to take a wait-and-see approach to rates to see how the latest rate cut plays out and what impact it has on the property market as well as the broader economy."

"The reserve bank would have also been encouraged to leave rates on hold this month as new data from the Westpac Melbourne Institute of Consumer Sentiment shows confidence enjoyed an 8% spike following the rate cut.

"This dramatic improvement in confidence means the number of optimists now outweighs the number of pessimists for the first time in 12 months.

"In addition to the improvement in confidence, new research from RP Data shows dwelling values continue to climb at a steady rate.

According to CoreLogic, RP Data's February Home Value Index results, Australia's combined capital cities had a 0.3% spike in dwelling values during the course of February, taking home values 8.3% higher over the past 12 months.

"While property values continue to climb, they are doing so at a much more moderate pace than previously recorded, which would provide the reserve bank with confidence that their February rate cut won't necessarily propel the rate of home-value growth as many might have expected it would," Ms Darnbrough said.

But while rates were left on hold this month, Ms Darnbrough warned that this did not mean the country had entered into another prolonged period of interest-rate stability.

"The reserve bank has made it very clear that they will cut the cash rate again in the not-too-distant future if the need arises," she said.

"With that in mind, it is likely that the reserve bank will continue to keep a close eye on the economy, including the property market, business and consumer confidence, inflation as well as the rate of unemployment," she said.

"Many of Australia's leading economists believe the reserve bank will look to cut the cash rate again before the end of the financial year.

"If that does happen, we can expect home-loan rates to fall further, which may or may not cause home values to grow.

"In the meantime, however, it really is a case of 'watch this space'."

Topics:  cash rate economy interest rates rba

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