The Reserve Bank of Australia has today announced that the official cash rate will remain on hold at 1.50% pa. This afternoons meeting will be the last until February as the bank suspends its meetings over the new year period.
2016 saw rates decrease by a half percent courtesy of a 0.25% rate cut in May and August.
Expectations for 2017 are mixed with many analysts tipping rates to drop further below the current low of 1.50% pa. Analysts have cited low wages growth, a high level of underemployment, and business investment bleeding more than 10% over the last year as reasons for further cuts.
Despite the historic low rate, Australia is seen as an attractive destination for foreign investors who are enjoying a better return in Australia then elsewhere in the developed world, where interest rates are close to zero. This inflow of money into the country continues to strengthen the Australian dollar which reduces the competiveness of our industries that rely on exporting. Experts point to this as another reason for the central bank to intervene and drop the current interest rate further.
Despite this, a number of lenders increased the interest rate on their fixed rate mortgages this week. Like lemmings off a cliff, it is expected most remaining lenders will do the same. The banks often argue that RBA decisions are just one small factor in determining the rates they charge homeowners on their mortgages. Cost of funding is often trotted out as the main contributor to their own internal interest rate decisions. Whether this means they are pricing in future RBA increases into their loans over the short to medium term, or if the recent increases are due to a rise in their cost of funding remains to be seen next year.
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Photography by Scott Lewis