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The surprise Reserve Bank decision to leave the official cash rate on hold at 3.75 per cent will help stimulate further activity in what remains a fragile market recovery.
While economic conditions remain stronger than expected, Reserve bank Governor, Glenn Stevens said inflation measurements and higher lending rates prompted the Reserve Bank to pause on interest rate hikes, for now.
Last quarter, headline inflation slowed to just 0.5 per cent, helped by a fall in commodity prices at the end of 2008 as well as a noticeable slowing in private-sector labour costs during 2009 and a period of slower demand.
While the Reserve Bank’s preferred measure of underlying inflation hit almost 0.7 per cent to reach an annual rate of 3.4 per cent – well above the central bank’s target band of 2 to 3 per cent – Mr Stevens said inflation is expected to be consistent with the target in 2010 regardless of whether or not there is another rate hike.
Raine & Horne’s chief executive officer Angus Raine told Real Estate Business that the Reserve Bank’s decision to keep interest rates on hold would bode well for the property market.
“When interest rates are kept on hold, it encourages more people to put their property up for sale,” Mr Raine said.
“People are feeling more confident than they were this time last year. They are feeling secure in their jobs, which is helping buoy consumer confidence.
“We need people to feel confident, because the more confident they feel, the more likely they are to put their house on the market, which in turn satisfies the growing demand for property.”
Mr Raine said demand for property was currently outweighing supply.
RP Data’s senior research analyst Cameron Kusher agreed and said the market continues to see low levels of new dwelling commencements.
On the rate front, Mr Kusher said he expects the official cash rate to hit 4.75 per cent by the end of 2010.
“The higher cost of servicing home loan finance and the removal of the First Home Owner’s Grant Boost is anticipated to result in more subdued rates of property value growth during 2010 as fewer buyers are in a position to enter the market, in particular First Home Buyers,” Mr Kusher told Real Estate Business.
“We would anticipate first home buyer activity will return to a more normal level during 2010 thanks to increasing interest rates and a removal of the Boost.”
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