Reserve Bank of Australia keeps the cash rate on hold in May

There have been some important developments in relation to the outlook for interest rates over recent months.

In their May Statement on Monetary Policy, the RBA painted a positive picture of the Australian economy. They continue to expect Australian growth to return to around 3% for the year by the end of 2018. Business conditions are very positive, with survey-based measures recording above average results. Conditions in the global economy also remain positive, with economic growth in most of Australia’s major trading partners at, or above, trend.

At their May meeting, the RBA Board decided to leave the cash rate unchanged, at 1.5%. Although the Australian economy is expected to strengthen, the RBA believe that leaving interest rates at the current level is necessary for two main reasons:

  1. To ensure there is still some level of inflation, to promote economic growth and wages growth.
  2. To help maintain a healthy level of employment and job creation in Australia.

Any changes to inflation and employment are likely to be gradual, even with low interest rates. 

Graph showing the underlying inflation from March 2013 to March 2017.

Sources: Datastream; RBA

 

Around this time last year, economists had been expecting interest rates in Australia would start to rise in late 2018. With inflation still low, concerns about the Australian housing market and a still cautious consumer, the market now expects the next move in interest rates will be into 2019.

This means we expect returns from cash allocations in our diversified options and the Cash Savings option to remain low for some time yet.