Reserve Bank’s cash rate may not budge until 2020

There are growing predictions that the Reserve Bank will keep the cash rate on hold until 2020—which spells good news for aspiring homebuyers trying to break into the housing market.

The Reserve Bank has signalled its concern about driving up interest rates too fast, adding that the high level of household debt in Australia poses risks for the entire economy.

The central bank left the cash rate on hold (at 1.5%) for a record 19th consecutive month last Tuesday. It has made no secret, however, of its concerns about leaving rates on hold for an extended period.

In its quarterly monetary policy statement, the Reserve Bank said its rates would have to go up at some point, which would hinge on a lift in inflation and wages. It also cautioned that any increase in rates would have to be tempered given the level of debt Aussies were carrying.

“The high level of household debt also carries certain risks, including that households’ spending decisions might become more sensitive to unexpected weakness in income or wealth,” the RBA said.

Shane Oliver, AMP Capital’s chief economist, believes that the Reserve Bank may not tamper with rates until 2020 given the state of the economy, particularly the housing market.

“A rate hike is now unlikely until 2020 as growth is likely to remain weaker than the RBA expects, wages growth and inflation are likely to remain low for longer, bank lending standards are tightening further and house prices in Sydney and Melbourne are falling with more downside ahead,” Oliver said. “In fact, raising rates at a time of falling house prices could be dangerous.”