Finance Finance News RBA to sit on its hands, but for how much longer?

RBA to sit on its hands, but for how much longer?

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• The RBA decision on interest rates is due at 2.30pm Tuesday

Borrowers are unlikely to see interest rates cut by the Reserve Bank of Australia on Tuesday, with the central bank expected to hold rates steady at its first board meeting of 2014.

Following the release on Monday of data on inflation, job ads and house prices, analysts said the RBA was likely to leave the cash rate at 2.5 per cent, but there could be room for further downwards moves later this year.

Last week, Westpac chief economist Bill Evans said he expected another cut in August, while on Monday the Australian Chamber of Commerce and Industry’s acting chief economist Burchell Wilson said it was “too early to rule out” further cuts this year. Others, like TD Securities’ Annette Beacher, said Australia was at the bottom of the rates cycle.

AMP Capital chief economist Shane Oliver said the RBA was at the end of its rate cutting cycle, and he expected a rate hike later in the year.

“Interest rates have already been cut to record lows and evidence continues to build that rate cuts are getting traction,” Dr Oliver said.

“Our assessment remains that the RBA would prefer to wait for the full impact of past rate cuts to flow through and is now more focused on achieving and maintaining a lower level for the Australian dollar.”

The reasons for the RBA to cut rates have been subsiding in recent months. In particular, the recent slide in the Australian dollar will have been welcomed by governor Glenn Stevens.

During the first half of 2013, the RBA noted the difficulties the strong local dollar was causing some parts of the economy. The Aussie was trading at $US1.06 in May last year capping an extended period above parity with the US dollar. But the local unit has since slipped to 87.7 cents, closer to levels the RBA is comfortable with.

A high Australian dollar makes life difficult for manufacturers, exporters and tourism businesses, while shoppers and overseas travellers are among the winners. 

While a gradual rise in unemployment will be watched closely by the RBA through 2014, inflation sits comfortably within its target range, meaning on balance there is not a compelling argument to cut or raise rates at present. But the RBA takes a long view and may have other variables, like the Chinese economy, in its sights.

Strong housing market

Further evidence of a return to confidence in the Australian housing market arrived from RP Data-Rismark on Monday, with capital city house prices recording a robust start to the year.

Prices in Melbourne rose 3.2 per cent in the month and almost 12 per cent in the year to January while prices in Sydney rose 0.8 per cent in January for a yearly rise of 13.4 per cent. Perth prices, however, declined 1.1 per cent, as did Darwin, while Adelaide was flat.

Home values are now 4.8 per cent higher than their previous peak in October 2010, the figures showed.

The strong figures were likely to dampen speculation about any possible cash rate cuts from the Reserve Bank of Australia in the medium term, RP Data research director Tim Lawless said.

“Together with the higher-than-expected inflation reading and a lower Aussie dollar, the sustained growth in dwelling values is another factor the RBA is likely to consider when deliberating on any movement in the cash rate,” Mr Lawless said.

Prices slacken

While house prices are rising, consumer prices elsewhere remain weak, which weakens the case for a rate rise.

A private measure showed inflation was weak last month, as prices rose for education, transport and utilities, but fell for clothing, holiday travel and books.

The TD Securities – Melbourne Institute Inflation Gauge rose by 0.1 per cent in January, after a surprise jump of 0.7 per cent the month before.

That puts the annual headline rate of inflation at 2.5 per cent, which is at the middle of the Reserve Bank’s target range.

TD Securities economist Annette Beacher says inflation is usually stronger in January due to seasonal factors, and last month’s price rises were driven solely by regular new year price increases for education, transport and utilities.

“Those three sectors were the biggest drivers upward of the gauge this month. So if you actually exclude those seasonal jumps we actually had a small fall in the CPI for the January report,” she said.

“I’m even more firmly of the view that the RBA’s done [cutting rates] for this cycle, however the global backdrop is not that certain,” she forecast.

“We are seeing emerging market volatility in the markets, so even though I do expect the next move to be up for the cash rate, I just can’t see that on a six-month horizon at this stage.”

Weak job ads, but not as weak

Job advertisements on the internet and in newspapers have fallen again, but the rate of decline is slowing.

The total number of job ads fell by 0.3 per cent in January, seasonally adjusted, following a 0.8 per cent fall the month before, the latest ANZ job advertisements survey found.

The number of jobs advertised in January was 8.9 per cent lower than the previous January, following a 16.7 per cent fall in the preceding 12 months.

The RBA decision is due at 2.30pm AEDT.

—with AAP