How long are the RBA likely to leave the cash rate on hold?

Tuesday, 4 November 2014  Media Alerts

“The continued overheating of the housing market needs to be addressed,” said the UNSW Business School’s Professor James Morley, who sits on the Shadow RBA Board.

The Reserve Bank of Australia will meet today to decide on interest rates, and whether to leave the cash rate on hold at 2.5 per cent, where it has been for the past 14 months - one of the longest periods of rates stability since 1990.

James Morley is a Professor of Economics and Associate Dean (Research) at UNSW Business School. He said “inflation eased in the most recent quarter to 2.3%. This provides the RBA with more scope to maintain its policy rate at the current low level.”

Australian headline inflation eased from 3% over the year in the second quarter to 2.3% in the third quarter.

However he warns the continued overheating of the housing market needs to be addressed before it leads to a huge problem in the future. Many analysts have been looking for any language in the RBA’s statement that could signal the start of a rate rise next year, in the light of an increasingly incendiary housing sector.

“Macro-prudential policies such as restricting loan-to-value ratios provide a possible means for the RBA to cool the housing market,” he said. “However these policies can have large distributional effects - for example they particularly affect first-time home buyers - without necessarily achieving a large overall effect on the market.”

He urges the Reserve Bank to begin a tightening cycle soon. “Therefore the RBA will have to back up any macro-prudential policies with an increase in the policy rate in the near term, returning it back towards its neutral level. A lower dollar and stable unemployment provide scope for such a move by the end of the year.”

On Thursday there will be fresh unemployment data from the ABS.

For further comment call James Morley on 02 9385 3366, 0406 842 550, or james.morley@unsw.edu.au

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