RBA holds interest rates at 1.5pc

New Governor Philip Lowe has added views on confidence and household consumption not previously provided.

The Reserve Bank has met market expectations in keeping the cash rate on hold at 1.5 per cent through its October board meeting.

The first meeting run by new Governor Philip Lowe came amid a sharp reduction in rate cut expectations, with markets increasingly downgrading the prospect of further action from the central bank given steady economic data.

Dr Lowe largely retained the analysis provided by former Governor Glenn Stevens last month, with a neutral bias again offered, although he added minor twists to commentary around growth, housing and the labour force.

The most significant was the suggestion some housing markets had regained momentum recently after a lull earlier this year.

“The rate of increase in housing prices is lower than it was a year ago, although some markets have strengthened recently,” he said.

The comments suggest more concern than displayed last month when Mr Stevens said the latest figures merely pointed to “moderate” price rises over the past year, although talk of a potential apartment glut was preserved.

It also comes after Dr Lowe said the high cost of housing was a concern for young buyers trying to get onto the property ladder.

“As a father of three children I worry … because people are paying so much for housing,” he told the House of Representatives Standing Committee on Economics last month.

On inflation, the RBA retained its view price pressures remained “quite low” and would likely stay that way “for some time”.

Dr Lowe did, however, add a note among his global commentary that pointed to inflation falling short of the targets of most central banks.

The bank otherwise reaffirmed its view on offshore conditions that point to below average global growth and stable financial markets.

Its analysis of the local economy was more colourful, with Dr Lowe expanding on last month’s broad view that “growth was continuing”.

“In Australia, the economy is continuing to grow at a moderate rate,” Dr Lowe said.

“The large decline in mining investment is being offset by growth in other areas, including residential construction, public demand and exports. Household consumption has been growing at a reasonable pace, but appears to have slowed a little recently.

“Measures of household and business sentiment remain above average.”

The view on positive confidence readings and lacklustre household consumption was not provided previously by Mr Stevens.

The labour market served as the final point of difference to last month’s commentary, although the view of indicators being “somewhat mixed” remained intact.

“The unemployment rate has fallen further, although there is considerable variation in employment growth across the country,” Dr Lowe said, an addition compared to last month’s statement.

“Part-time employment has been growing strongly, while growth in full-time employment has been subdued. The forward-looking indicators point to continued expansion in employment in the near term.”

IG chief market strategist Chris Weston said the statement was indicative of a new governor making his mark without looking to make any significant shift to policy.

“The statement itself is a whole 111 words longer than September and Dr Lowe has clearly come in as a governor with something to say,” he said.

“Many will focus on the housing market and once again they have specifically targeted the apartment market as vulnerable. But we have also heard a real softening of concern around growth in lending for housing, with turnover in the housing market declining.

“This is a central bank that has the door somewhat open for further easing, but it seems very comfortable with policy at 1.5 per cent.”

Ahead of the meeting, futures markets priced in a 3.4 per cent chance of a cut today and a 27.7 per cent probability of a reduction by the end of the year, as against readings 10 percentage points higher after the last RBA meeting on September 6.

Following the meeting, the chances of a rate cut by year’s end have increased modestly to 28.3 per cent.

The shift in sentiment has come as the economy expanded through the June quarter at its fastest annual clip in four years, the jobless rate ticked down to a three-year low and house prices continued their ascent.

Barring an economic shock, it would appear the chances of a rate cut rest entirely on the release of the last quarterly inflation reading for the year, due on October 26.

“We may need to see core inflation at 0.2 per cent quarter-on-quarter and a sharp pick up in financial market volatility to compel the RBA to ease the cash rate in the months ahead,” Mr Weston said.

“However, the hurdle is still very high and this notion that they are going to cut due to the Australian dollar is misinformed.”

The Australian dollar edged down on the RBA commentary, losing US0.1c to US76.65c at 2.45pm (AEDT).The Reserve Bank has met market expectations in keeping the cash rate on hold at 1.5 per cent through its October board meeting.