The Reserve Bank has left interest rates on hold at a 60 year low of 2.5 per cent, ahead of the Federal Government’s annual budget announcement next week.
The central bank announced this afternoon that the official cash rate would remain unchanged for the ninth month in a row following its May board meeting this morning.
Economists warn, however, that the future direction of rates heavily depends on the Abbott Government’s 2014-15 budget announcement on May 13 – and opinion is sharply divided on what will happen in the months to come.
The Australian dollar has risen above 93 US cents after the Reserve Bank of Australia left the cash rate unchanged at 2.5 per cent at its board meeting on Tuesday.
At 2.35pm AEST the currency was worth 93.12 US cents, up from 92.82 US cents shortly before the RBA’s decision was announced. The currency ended Monday’s local session at 92.80 US cents.
The RBA board believes monetary policy is “appropriately configured” to foster sustainable growth in demand and inflation within the bank’s target range of two to three per cent, governor Glenn Stevens said in a statement.
“On present indications, the most prudent course is likely to be a period of stability in interest rates,” he said.
The most recent interest rate movement was a quarter of a percentage point cut in August.
Mr Stevens noted concerns about Chinese growth, but said outcomes for other countries appear to be improving.
“China’s growth appears to have slowed a little in early 2014 but remains generally in line with policymakers’ objectives,” he said.
“Commodity prices in historical terms remain high, though some of those important to Australia have softened further of late.”
The statement from Mr Stevens was little changed from the previous month, although the central bank’s outlook on the labour market had improved, Commonwealth Bank chief economist Michael Blythe said.
“That period of stability on interest rates is set to continue for a while yet,” he said.
“What is interesting are a few indications that they’re a little bit more positive on the labour market and also a little bit more comfortable on the inflation outlook.”
It also appeared the RBA’s concern with the high Australian dollar had shifted towards rising house prices, Mr Blythe said.
“The jawboning has shifted to the housing market and away from the currency,” he said.
According to an AAP survey of 15 economists, seven expected rates to remain on hold through 2014, three forecast another cut to a new low of 2.25 per cent and five predicted hikes later in the year.
AMP chief economist Shane Oliver expected the cash rate to finish 2014 at three per cent, but cautioned that that this depended on whether or not the Federal Government delivers a “slash and burn” budget.
“In four or five months, I think there will be enough evidence that the economy has picked up and, therefore, the case will have built for the RBA to start normalising interest rates. But, that is contingent on the government not getting too aggressive with fiscal austerity,” Dr Oliver said.
In contract, JP Morgan chief economist Stephen Walters forecasts that a tough budget, the persistently high Australian dollar and rising unemployment means the RBA will likely cut the cash rate to 2.25 per cent in August.
— Shane Oliver (@ShaneOliverAMP) May 6, 2014
— CommSec (@CommSec) May 6, 2014