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Rates remain low, but for how much longer?

Australians have now enjoyed nine straight months of record low interest rates – and it doesn’t look like changing any time soon.

The Reserve Bank of Australia on Tuesday kept the cash rate at 2.5 per cent and reiterated it will stay unchanged for some time to come.  

“On present indications, the most prudent course is likely to be a period of stability in interest rates,” RBA governor Glenn Stevens said in a statement after the May board meeting.

Mr Stevens noted that the local employment market was still quite weak and the exchange rate was still quite high.

“There has been some improvement in indicators for the labour market, but it will probably be some time yet before unemployment declines consistently,” he said.

“The decline in the exchange rate from its highs a year ago will assist in achieving balanced growth in the economy, but less so than previously as a result of the rise over the past few months.”

It nevertheless confirms the point that the RBA is a long way from hiking rates

HSBC chief economist Paul Bloxham said the only surprise in the statement was that the RBA did not revive its campaign to talk down the Aussie dollar.

“Given inflation has come in a bit lower than expected they had an opportunity to do that, but it seems that they remain more comfortable with the current level of the Aussie dollar than they had been late last year,” he said.

“They talked about the Aussie dollar being high but they didn’t say it was uncomfortably high.”

Mr Bloxham believes the RBA’s “period of interest rate stability” will only last a few more months.

“We do think the economy is turning around fast enough that the RBA will have to lift the cash rate before the end of this year,” he said.

National Australia Bank senior economist Spiros Papadopoulos said it won’t be an interest rate hike until there is a significant improvement in jobs growth and non-mining expenditure.

“While it’s stating the obvious, it nevertheless confirms the point that the RBA is a long way from hiking rates.”

Mr Papadopoulos said the bank is keeping a neutral bias – happy keep the cash rate unchanged and see how the economy plays out in coming months.

Westpac chief economist Bill Evans says the RBA will stay on hold until the second half of 2015 but acknowledges he’s in the minority in taking that view.

“A high Australian dollar, the ongoing downturn in mining and a rising unemployment rate – despite a stronger jobs environment than in 2013 – all point to an extended period of interest rate stability,” he said.

-AAP

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