Reserve Bank keeps rates on hold at record low 1.5pc

The central bank has kept interest rates on hold at 1.5pc, as it notes political uncertainty in Italy and rising trade tensions.

Pedestrians walking past the Reserve Bank of Australia in Sydney. Picture: AAP

Australia’s central bank on Tuesday kept interest rates unchanged as expected, signalling that it continues to await higher wages growth before it taps the policy brakes.

The Reserve Bank of Australia left its cash rate target at 1.5 per cent, where it has stood since mid-2016.

“Inflation is low and is likely to remain so for some time, reflecting low growth in labour costs and strong competition in retailing. A gradual pickup in inflation is, however, expected as the economy strengthens,” RBA Governor Philip Lowe said.

“Wages growth remains low. This is likely to continue for a while yet,” he added.

Financial markets have priced in an interest rates increase for mid-2019, but some economists warn that the RBA could remain dormant much longer due to a soft housing market.

A string of forecasters have in the last month abandoned the idea that interest rates will be raised before the end of the year.

RBA board member Ian Harper recently told the Wall Street Journal that policy settings are likely to remain on hold for some time.

“That is actually the best thing the bank can do for encouraging the confidence and stability that would then feed into higher wages,” Mr Harper said.

The RBA is contending with a number of headwinds for the economy, both local and overseas.

Signs that the global economic upswing, which has lifted commodity prices, is starting to falter amid growing global trade tensions, could keep the RBA sidelined for longer.

Locally, house prices are falling, led by the major capitals of Sydney and Melbourne, feeding fears that consumers will curb spending.

House prices on year fell in May for the first time since October 2012. Month-on-month, May marked the eighth consecutive fall since the national market peaked in September last year.

Fresh lending to housing investors has already slumped to a five-year low.

Shane Oliver, chief economist at AMP Capital, said house prices in Sydney and Melbourne are on track to fall 5 per cent this year and in 2019, and continue their slide into 2020.

The housing downturn comes as banks have come under fire following a year-long judicial inquiry called by Canberra into allegations and admissions of wrongdoing by financial firms.

Economists warn the increased scrutiny could see banks move to more conservative lending, thereby putting an additional brake on the economy.

Still, its not all gloom.

Low interest rates are supporting strong business conditions and hiring by firms is rising. Participation in the labour market, especially among women, is rising, helping to ease concerns around household debt, which is among the highest in the world.

The RBA has forecast on-year GDP growth of more than 3 per cent in 2018. GDP data for the first quarter is due on Wednesday and is expected to show the economy rebounding from a fourth quarter slump brought on by storms which shut key commodity ports.

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