Rates on hold as RBA plays wait and see

The Reserve Bank has kept interest rates steady for the seventh consecutive month, saying the prospects for an improvement in the national economy “had firmed”.

At its final meeting for 2015, the RBA held the official cash rate steady at an historically low 2 per cent, the level reached when it last moved rates lower in May this year.

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Economists predicted rates would not be cut further at today’s meeting. The big four banks recently raised rates independently of the RBA, telling borrowers it was to cover the cost of new capital rules.

RBA governor Glenn Stevens said the Board of the central bank again “judged that the prospects for an improvement in economic conditions had firmed a little over recent months and that leaving the cash rate unchanged was appropriate.”

“Members also observed that the outlook for inflation may afford scope for further easing of policy, should that be appropriate to lend support to demand.

“The Board will continue to assess the outlook, and hence whether the current stance of policy will most effectively foster sustainable growth and inflation consistent with the target.”

Ahead of the meeting, RBA governor Glenn Stevens had urged economists to “chill out” about rate cuts.

He maintained that relaxed tone in a statement issued after the meeting, noting that while economic growth has been below long-term averages, unemployment is steady, inflation low, business conditions improving and the Aussie dollar weaker.

The statement also reaffirmed that the Board remained open to a rate cut given the low inflation outlook.

Factors weighing on RBA’s mind

Key quarterly economic growth figures are due on Wednesday, followed by inflation data in January.

The US Federal Reserve and European Central Bank are also expected to move rates soon.

“If the RBA were to move rates in the near term, the risk remains that it is likely to be lower rather than higher,” said St George bank’s senior economist Janu Chan, adding that she believes rates will be on hold until early 2017.

“A strong GDP outcome released tomorrow will reduce this risk, but there remain questions about the transition from mining investment to non-mining sectors of the economy, particularly over the first half of next year.”

Housing market

In its statement, Mr Stevens noted the cooling of home prices in the booming property markets of Sydney and Melbourne.

He added that while recent mortgage rate hikes by banks would reduce spending, “overall conditions are still quite accommodative”.

RBC Capital Market’s chief economist Su-Lin Ong believes further cooling in the housing market combined with another side in commodity prices and a strengthening by the Aussie dollar could pave the way for a rate cut in 2016.

“Should these trends continue into 2016, the RBA may be a little less relaxed at its first board meeting for 2016 in February,” she said.

-with AAP

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