RBA holds interest rate at 1.5%

The Australian sharemarket is set to open unchanged this morning

The Australian sharemarket is set to open unchanged this morning

Reserve Bank of Australia is expected to stand pat on its 1.5 percent cash rate in the meeting later in the day, according to a Reuters poll.

Boosting transport links and infrastructure would help in addressing some of the supply concerns, he added. At the same time, though, slow growth in wages is making it harder for some households to pay down their debt.

"We continue to see rates on hold at 1.5% for an extended period, with concerns around persistently low inflation offset by the strength in the housing market".

Lowe noted the economy was "continuing its transition following the end of the mining investment boom".

Ms Auld said it seemed like the central bank's assertion that the economy would achieve three per cent growth over the next two years was no longer the key message.

Excessive house price inflation has been an ongoing issue in Australia.

CoreLogic head of research Tim Lawless said the combination of higher mortgage rates, as well as firmer policy settings from APRA around investment lending and more scrutiny from ASIC on lending behaviour are likely to "take some heat out" of investment demand.

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"The current annual GDP growth in Australia of 2.4 per cent remains tepid, reflected in continuing low wage growth as well as business investment", he said.

Dr Lowe blamed the rise of these loans (which he described as "unusual by worldwide standards") in part on the "taxation arrangements that apply to investment in residential property" - a veiled reference to negative gearing and the capital gains tax discount.

"Too many loans are still made where the borrower has the skinniest of income buffers after interest payments", Reserve Bank of Australia Governor Philip Lowe said in a speech on Tuesday.

The Australian Prudential Regulation Authority said last week that interest-only loans should account for no more than 30 percent of new loans. A reduced reliance on interest-only housing loans in the Australian market would also be a positive development.

"With the cash rate likely to remain on hold, at least for the remainder of the year, it's looking increasingly like other factors will be necessary to undertake the heavy lifting required to bring about a housing market slowdown. In fact, we still believe it may prompt it to cut interest rates to 1.0 percent later this year". With global interest rates so low, many investors have found it attractive to borrow money to invest in appreciating residential property.

The RBA will probably need a few months to gauge whether these new measures will work to cool the housing market.

"It would consider further measures if needed", he warned.

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