Builders across Australia are breathing a sigh of relief as the nation’s central bank has hit pause on further interest rate rises for now.

But the bank has warned that further rate rises may be needed to bring inflation under control.

At its monthly board meeting on Tuesday, the Reserve Bank of Australia left official cash rates unchanged at 3.60 percent.

The decision follows a series of ten consecutive rate rises since last May (with the exception of January when the board did not meet) which have seen official interest rates rise from 0.1 percent in May to 3.6 percent last month.

In a statement, the Bank said it decided to hold interest rates steady for this month at least in order to provide more time to assess the impact of previous rate rises.

Whilst global inflation remains high and labour markets in Australia remain tight, the board said several factors support the decision to pause on further rate hikes.

These include that inflation has peaked (and medium-term inflation expectations remain well-anchored), growth in the Australian economy has slowed and wages growth remains in check for now despite historically low levels of unemployment.

“At its meeting today, the Board decided to leave the cash rate target unchanged at 3.60 per cent and the interest rate on Exchange Settlement balances unchanged at 3.50 per cent,” the bank said in its statement.

“This decision follows a cumulative increase in interest rates of 3½ percentage points since May last year. The Board recognises that monetary policy operates with a lag and that the full effect of this substantial increase in interest rates is yet to be felt. The Board took the decision to hold interest rates steady this month to provide additional time to assess the impact of the increase in interest rates to date and the economic outlook …

“… The Board expects that some further tightening of monetary policy may well be needed to ensure that inflation returns to target. The decision to hold interest rates steady this month provides the Board with more time to assess the state of the economy and the outlook, in an environment of considerable uncertainty. In assessing when and how much further interest rates need to increase, the Board will be paying close attention to developments in the global economy, trends in household spending and the outlook for inflation and the labour market. The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that.”

For the building industry, the latest decision comes as new data on lending and building approvals on Monday indicated that demand for new housing is being severely impacted by previous rate rises.

In terms of lending, the data indicates that the number of loans that were approved to owner occupiers for the purpose of either constructing a new home or purchasing a newly constructed home fell by a further 3.4 percent in seasonally adjusted terms to reach 4,267. This represents the lowest number of loans for these purposes since November 2008.

Meanwhile, dwelling approvals steadied during February after a horror January but remain at their second lowest level on record (seasonally adjusted) since July 2012.

Meanwhile, ongoing pressures on costs are feeding through into more builder insolvencies.

Last week, Victorian based home builder Porter Davis collapsed with 1,700 homes unfinished across Victoria and Queensland.

Meanwhile, the Port Melbourne based builder Lloyd Group – which specialized in civil infrastructure projects for state and local governments in Victoria and New South Wales – called in voluntary administrators last week.

Master Builders Australia CEO Denita Wawn welcomed the RBA’s decision.

“Amid a difficult economic climate, the building and construction industry welcomes the Reserve Bank of Australia’s decision to pause interest rates today,” Wawn said.

 

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