In an HSBC Global Research report titled The RBA Observer, the RBA faces a “tricky trade-off” as it must balance the financial cycle and the real economy.
“Low interest rates are needed to support the rebalancing of growth towards the non-mining sectors and [should] encourage [the Australian dollar] to fall.
“At the same time, low rates are also stoking a housing price boom in some cities, particularly Sydney (up 40 per cent in three years) and to a lesser extent Melbourne (up 24 per cent),” the report found.
Rates will remain on hold until the RBA can ascertain the impact on local economic activity of the previous cuts delivered this year, said HSBC.
“Having just delivered a further [25 basis point] cut in the cash rate earlier this month, we expect the RBA to be in ‘watch and wait’ mode,” the report said.
“The RBA will be watching for signs that lower interest rates and the government’s more positive Budget message could drive a lift in business confidence, which may eventually translate into a pick-up in business investment over time.”
In the face of increasing asset prices, the Australian Prudential Regulation Authority (APRA) has been tightening lending standards since late 2014.
Tightening by APRA may allow the RBA to cut rates at a later date, without excessive concern about overinflating the property market, if the dollar does not depreciate.
The RBA will, however, wait for the currency to begin depreciating, HSBC said.
"It is clear that central bank would prefer an Australian dollar depreciation to do the work for it in terms of further supporting the rebalancing of growth," HSBC said.
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