The Reserve Bank of Australia's concerns about high levels of household debt appear to have mellowed following its stern warning to lenders and a tightening of rules on mortgage lending.
The RBA held the cash rate steady for a ninth consecutive month at its May board meeting, as expected, leaving the rate at 1.5 per cent.
The central bank's concerns about rising household debt destabilising the financial system prompted a warning from RBA governor Philip Lowe in April about the prevalence of interest-only loans, and the small buffer against financial shocks that many borrowers hold.
His statement on Tuesday featured a different tone, amid evidence that efforts by the Australian Prudential Regulation Authority to cap interest-only lending, and more prudent measures from the banks, are working to contain property lending growth.
"The recently announced supervisory measures should help address the risks associated with high and rising levels of indebtedness," Dr Lowe said in the statement.
The RBA noted headline inflation of 2.1 per cent in the year to March 31, back within the central bank's two to three per cent target band for the first time in more than two years.
The bank also maintained its forecast of economic growth increasing gradually to above three per cent in next few years.
However Dr Lowe said labour market conditions remain mixed, with unemployment recently creeping higher, and wages growth expected to remain slow as the jobless rate gradually declines.
Commonwealth Bank senior economist Gareth Aird said the governor's statement indicates rates will remain on hold well into 2018.
"Governor Philip Lowe has made it crystal clear that concerns around rapid dwelling price growth and the level of household debt mean that the cash rate is unlikely to go lower unless there is a sustained loss of momentum in job creation," he said.
TD Securities chief Asia-Pacific macro strategist Annette Beacher believes the central bank's next move will be a rate hike, if economic growth remains in line with the RBA's forecasts and household debt remains a mild concern.
"The RBA has no appetite to cut, and the cash rate needs to be lifted off the floor eventually," she said.
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