Chat with us, powered by LiveChatRBA leaves Interest Rates on hold for another month

RBA leaves Interest Rates on hold for another month

Borrowers have been spared higher interest payments for at least another month after the Reserve Bank decided to keep interest rates on hold for the eighth consecutive meeting in response to a patchy local economy and offshore worries.

The RBA board left the official cash rate at 4.75 per cent, the level reached when rates were last hiked on Melbourne Cup Day in November.

Although many economists predicted today's outcome, the decision was made less certain after a jump in the latest inflation figures. The June quarter headline consumer price index came in at 3.6 per cent, the highest since 2008 and outside the RBA's target band of 2-3 per cent, according to data released last week.

The RBA board members also had to consider the impact higher borrowing costs would have on a uneven local economy. The picture was further complicated by a gloomy global outlook, with the US today narrowly avoiding a crisis over its debt limit.

"The board judged that it was prudent to maintain the current setting of monetary policy, particularly in view of the acute sense of uncertainty in global financial markets over recent weeks," said RBA governor Glenn Stevens in an accompanying statement.

Dollar drops

The Aussie dollar dropped on the RBA comments, losing more than half a US cent to $US1.091 from $US1.0978, as investors cut their expectations of an early rate move.

"Credit growth has declined over recent months and is very subdued by historical standards, even with evidence of greater willingness to lend," said Mr Stevens in the statement. "Most asset prices, including housing prices, have also softened over recent months. "

"The RBA seem paralysed by uncertainty in the global markets,'' said London-based Kathleen Brooks, research director at currency house GAIN Capital Group.

"Although they noted that longer term underlying inflation trends were pointing higher, they don’t seem to be worried enough to raise rates, instead noting that Aussie dollar strength is acting as a tightening force on the economy."

‘‘I don’t believe we will see higher rates until the Aussie weakens substantially while inflation remains high or credit growth in the economy picks up," she said.

Investors also raised their expectations of lower interest rates in the future. Markets now rate the likelihood of a 50 basis point cut in 12 months' time as a 60 per cent chance, according to investment bank Credit Suisse.

What the RBA said

"Downside risks have increased, however, as concerns have grown over the outlook for the public finances of both Europe and the United States," he said.

Mr Stevens also said that the decision by households to keep a tight rein on spending was "likely to keep some areas of demand weaker in the near term than earlier expected".

Westpac economics, which surprised many last month by predicting the next RBA move would be a rate cut, said today's comments by the RBA on slow credit growth, sliding home prices, and the high exchange rate, suggest that financial conditions are "tighter than normal."

"This appears to be recognition that the stance of monetary policy may be more than just the ‘mildly restrictive’ stance that has been described in past statements,’’ said Dr Bill Evans, Westpac's chief economist. ‘‘That gives us some encouragement that in deciding policy in the future the bank is recognising that interest rates may be further above neutral than the bank had assessed in the past.’’

"In time it may even come to recognise that rates are in fact too high given current economic conditions,’’ said Dr Evans.

Patchy growth

Despite the creeping inflation pressure, many sectors of the economy have languished in recent months, with consumer confidence dented by in part by the on-going worries about the state of the US and European economies.

Data on the home front is not much brighter. Figures out today from the Australian Bureau of Statistics showed building approvals fell 3.5 per cent in June. The fall surprised economists who had tipped a 3 per cent rise after two months of falls.

Second quarter median house prices have also dropped 1.9 per cent in the year to June, the ABS said, underscoring the weakness in the residential property market nationwide.

'Least regrets'

HSBC chief economist Paul Bloxham said the RBA rates decision could not have been made in a more complicated environment, with inflationary pressures gathering against a backdrop of rising uncertainty from overseas.

But he said opting to leave rates steady was “a policy of the least regrets”.

“The RBA could have great regrets from potentially moving and some regrets from not moving but on balance they thought it was the right decision (not to move).”

RBC Capital Markets economist Su-Lin Ong said the decision showed the RBA remained concerned with the medium-term inflation outlook.

"What’s more pressing is the uncertainty about the global backdrop and that’s dominating at the moment," she told BusinessDay.

"Greece and US debt ceiling probably dominated the discussion. In times of uncertainty the RBA has a tendency to sit on its hands and that's what it’s doing now."

Source: The Age Domain