Interest rates on hold for now

Interest rates don’t appear to be moving any time soon, with recent falls in the Australian dollar still failing to impress the Reserve Bank.

The Reserve Bank of Australia (RBA) kept the official cash rate on hold at 2.5 per cent at its monthly meeting, extending the current period of interest rate stability into its 14th month.

Rates last changed in August 2013 when they were cut to 2.5 per cent.

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The Australian dollar fell almost a quarter of a US cent after the announcement. The currency was worth 87.34 US cents at 1433 AEDT, down from 87.55 US cents shortly before the RBA’s decision was announced.

The Reserve Bank has kept its language cautious, reiterating that the most prudent course is likely to be a “period of stability in interest rates”.

“In the Board’s judgement, monetary policy is appropriately configured to foster sustainable growth in demand and inflation outcomes consistent with the target,” Governor Glenn Stevens said in his statement.

Despite a falling Australian dollar, the RBA had been predicted by an AAP survey of 13 economists to keep rates on hold today, and for the rest of 2014.

Mr Stevens said though the dollar had fallen, it was offering less assistance than would be hoped for and remained high by historical standards.

“The exchange rate has declined recently, in large part reflecting the strengthening US dollar, but remains high by historical standards, particularly given the further declines in key commodity prices in recent months,” he said.

“It is offering less assistance than would normally be expected in achieving balanced growth in the economy.”

In its statement it said growth remains below trend, unemployment is expected to remain high, wage growth is low and inflation is within target.

Economists react

ME Bank general manager markets John Caelli was not surprised by the unchanged cash rate despite the Australian dollar falling and concerns about rising house prices.

“The RBA’s key focus remains on providing conditions to support business investment and employment,” Mr Caelli said.

“The RBA has flagged that measures other than interest rates may be more appropriate to address the issue of house prices.

“The RBA minutes continue to refer to a period of stability in interest rates and so we expect any rises in rates won’t occur until the first half of 2015.”

UNSW Business School’s Professor James Morley, who sits on the Shadow RBA Board, said there is a “strong impetus” for the RBA to begin increasing interest rates.

“The main risk to the domestic outlook remains over exactly how contractionary an implemented budget will turn out to be,” he said.

“On balance the RBA should start to increase interest rates before the end of the year, especially if the housing market continues to overheat and in the absence of a more sustained large upward movement in the unemployment rate.”

JP Morgan economist Ben Jarman said the RBA’s statement showed it was paying close attention to falling commodity prices and China’s weakening property market.

That means interest rate hikes are likely still a way off, he said.

“It seems like that’s well and truly on the backburner, if anything the way that the concerns are evolving towards external issues like Chinese commodity prices suggests they are being more cautious,” Mr Jarman said.

Concerns about a possible housing bubble did not appear to be weighing heavily on the RBA’s mind, he added.

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