New Reserve Bank boss Philip Lowe tipped to keep rates on hold

New Reserve Bank governor Philip Lowe will preside over his first meeting of the bank’s board tomorrow.

New RBA governor Philip Lowe.

New Reserve Bank governor Philip Lowe will preside over his first meeting of the bank’s board tomorrow but is considered — certain to leave the benchmark cash rate at its record low of 1.5 per cent.

Dr Lowe has expressed his optimism about the outlook for the Australian economy, expecting the end of the downturn in investment in the resources ­sector and stronger export prices to bring further gradual falls in the unemployment rate over the year ahead.

The most important reports on the Australian economy since last month’s board meeting were the national accounts, which showed the economy grew by an above average 3.3 per cent last year, and the latest labour force report showing the jobless rate is down to a three-year low of 5.6 per cent.

Financial markets are trading on the basis that there is no chance of a rate cut at ­tomorrow’s meeting of the ­Reserve Bank board, but they are becoming more sceptical about the central bank’s ability to keep rates on hold into 2017.

Following the release of the updated agreement between Scott Morrison and Dr Lowe that emphasised the importance of keeping inflation stable, and commentary from Dr Lowe suggesting he was in no hurry to get inflation back to the target band, financial markets had pushed back the timing for further rate cuts to at least May next year.

However, rising concern about the global economy, including instability at Germany’s biggest bank, Deutsche Bank, has left markets trading on the basis that there is at least a 50 per cent chance of another rate cut by February.

The Reserve Bank will be influenced by trends in the housing market.

Dr Lowe does not believe the bank’s two rate cuts this year have fired a new surge in the ­already overheated Sydney and Melbourne housing markets, but market economists are not convinced.

A research note from Deutsche Bank calculates that if interest rates had remained at 2011 levels, then the household ­borrowing power would have ­averaged $385,000 this year; the fall in rates has raised this to $504,000.

UBS economists Scott ­Haslem and George Tharenou say house prices are rising fast while auction clearance rates in Sydney and Melbourne are the strongest in over a year.

Although turnover in the housing market is down by 11 per cent, they argue that these figures are often revised higher as details of sales of units “off the plan” ­become available.

They said the strength of the housing market meant that the Reserve Bank would keep rates steady.