Australian mortgage holders had a win on Tuesday, with the Reserve Bank of Australia leaving interest rates on hold at 4.75 per cent – where they have been since the RBA last increased rates on Melbourne Cup Day in November 2010.
The decision was not unsurprising given the substantial contraction seen in the economy over the March quarter – according to figures released by the Australian Bureau of Statistics, Australia's gross domestic product dropped 1.2 per cent over the quarter to March 2011, largely due to the destruction of Australia's commodity exports by the widespread natural disasters at the beginning of the year.
The statement by Reserve Bank Governor, Glenn Stevens, clearly noted this economic suffering. "The floods and cyclones over summer have reduced output in some key sectors," he said. "As a result there was a sharp fall in real GDP in the March quarter."
In terms of inflation, which is a key consideration for the Reserve Bank in its deliberations, the Governor's statement ended with the expectation that CPI inflation will be close to target over the next 12 months. Given that the next set of quarterly inflation figures is due out at the end of July, it is possible that a rate rise may not be on the agenda until August or September, when the RBA has had a chance to digest the implications of the data.
This forecast has been supported by the release of April's jobs figures from the Australian Bureau of Statistics last Thursday, which showed that the Australian labour market had a fall in the number full-time jobs for the second month in a row, with full-time unemployment flat for the year.
However, from our perspective and that of many analysts, there is a strong possibility that the RBA will be on track to raise rates before the year is out, given the relatively strong position of the Australian economy overall. Glenn Stevens said in his statement that "over the medium term, overall growth is likely to be at trend or higher."
Such a hold on rates for this month and potentially July as well is excellent news for home owners and prospective buyers. Mortgage holders now have some more time to prepare for a rate increase, building the possibility into the household budget. Prospective buyers have also been granted some more time to carefully consider purchase options, and to lock in attractive interest rates on new mortgages.
I encourage all mortgage holders and prospective buyers to use this window of opportunity wisely and to make prudent decisions when it comes to budgeting and researching alternative financing options.