RBA holds cash rate for May

The impending budget announcement is the “big unknown” according to the Australian National University Centre for Applied Macroeconomic Analysis (CAMA) RBA shadow board.

“[The budget] will likely include a housing package, yet big reforms such as changes to negative gearing and capital gains tax concessions are off the table,” the CAMA RBA shadow board said.

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“The government’s announcement to fast-track last year’s $50 billion infrastructure plan will generate a sizeable fiscal stimulus.”

AMP Capital chief economist Shane Oliver said that while Australian inflation had reached the RBA’s target level, other metrics did not yet support a rate hike.

“The rise in headline inflation to back within the RBA’s 2-3 per cent target zone has reduced the pressure to cut rates again at a time when the RBA would rather not cut anyway given worries about the Sydney and Melbourne property markets,” he said.

“But continuing low underlying inflation pressure at a time of very high underemployment, record low wages growth and a still too high Australian dollar means that its way too early to be thinking about raising rates. Our base case remains that the RBA will be on hold out to the second half of 2018 when rates will start to rise.”

Additionally, as noted by the CAMA RBA shadow board, policy makers and economists remain “on edge” over a number of geopolitical trends.

“International news is dominated by electoral uncertainty and geostrategic posturing. In particular, the sabre-rattling by the leaders of North Korea and US are cause for concern. An intensification of this conflict will likely unsettle global financial markets, with implications for the Australian market also,” the CAMA RBA shadow board said.

The RBA’s decision was in line with the ASX 30 Day Interbank Cash Rate Futures’ expectations, which had priced in a 98 per cent chance of no change on 1 May.