RBA keeps rates on hold, Aussie surges

The Reserve Bank of Australia (RBA) opted to keep rates on hold  on Tuesday, June 2nd, as the risks to inflationary pressures in the housing market appeared to be too great, for now. After making two cuts this year already to the cash rate, the RBA left it at two per cent, which sent the Australian dollar soaring.

On the back of the news, the Aussie surged more than one per cent versus the US dollar as commentary surrounding the decision suggested that the RBA was in no rush to implement further rate cuts. However, the bank did signal that it wanted the Aussie to weaken further, likely to provide further boosts to exporters and local companies.

But cutting the cash rate further could exacerbate inflation in property markets, especially in Sydney and to a lesser extent in Melbourne.

Housing price growth in Sydney is a staggering 15 per cent a year, which is heightening fears that a housing bubble is on the horizon.

"When you look at the housing price bubble evidence, it's unequivocally the case in Sydney, unequivocal," said Treasury secretary John Fraser on Monday.

"It's certainly the case in the higher priced areas of Melbourne,” he added and further explained that the key drivers were easy access to cheap finance due to low interest rates. 

“It does worry me that the historically-low level of interest rates are encouraging people to perhaps over-invest in housing," he said.

It’s no surprise then that the RBA has decided to keep rates on hold, in particular after recent data showed a surprise increase in export volumes, which is expected to add to first-quarter GDP growth, due on Wednesday June 3rd.

Therefore, the RBA seems happy to wait for data to roll in before making any decisions.

“Information on economic and financial conditions to be received over the period ahead will inform the Board's assessment of the outlook and hence whether the current stance of policy will most effectively foster sustainable growth and inflation consistent with the target,” Glenn Stevens, governor of the RBA, said in the monetary policy decision statement.

However, he warned that slowing business investment is a cause for concern following last week's dismal capital expenditure survey. 

“A key drag on private demand is weakness in business capital expenditure in both the mining and non-mining sectors and this is likely to persist over the coming year,” Mr Stevens explained.

He also pointed out that public spending is forecast to be subdued, slow growth is expected in labour costs, and inflation is predicted to remain steady over the next couple of years, even if the Aussie depreciates - with this in respect, he said that “the economy is likely to be operating with a degree of spare capacity for some time yet”.