The Reserve Bank of Australia (RBA) is set to hold its monthly board meeting to discuss potential changes to the official cash rate tomorrow – but don't expect any changes.
25 out of 28 economists agree with me (or the other way around), according to Bloomberg.
In previous months, the RBA has said it was concerned about the high Australian dollar exchange rate compared to the US dollar, suggesting if it remained high, the central bank could cut rates to bring it down.
Cutting official cash rates generally flows through into other markets, making it less attractive for foreign investors to pour money into the country to earn higher rates of interest.
Luckily for the RBA, the Australian dollar has dropped to around 73 US cents, roughly where the central bank wants it.
The RBA has been worried that if it cut the cash rate further, it could see more speculation and heat come into Australia's property market. That's actually a misnomer. There's no one property market, and while Sydney median house prices have been rocketing along – up 20% or more in the past year, other capital cities – apart from Melbourne – have struggled to generate low single digit growth, and some cities like Perth have gone backwards.
Action by the big four banks Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC) to limit investor loan growth, by setting lower maximum loan-to-valuation ratios and raise interest rates on investor loans.
The other issue that the RBA is looking at is the state of our economy and rate of growth – inflation mainly, but also other factors like unemployment and business and consumer confidence. If those indicators suggest the economy is heading backwards, the central bank can be forced to lower rates. Again, luckily for the bank, those indicators seem to be stable, suggesting there will no rate moves tomorrow.
Foolish takeaway
Many economists suspect the next rate move will be up, but there seems to be little evidence that inflation will jump above the RBA's band of between 2 and 3 percent in the short-to-medium term. Yes folks, low rates appear here to stay for some time yet.
