Finance Finance News No change: RBA keeps cash rate on hold

No change: RBA keeps cash rate on hold

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The Reserve Bank has resisted pressure to cut the official cash rate, despite sluggish growth, rising unemployment and low consumer and business confidence.

The decision will surprise the market, which expected RBA governor Glenn Stevens to cut the rate to a new record low of 2 per cent, from its current level of 2.25 per cent.

• Wage rises slow to 17-year low
• RBA worried about house prices

While there was no cut today, Mr Stevens left the door open for more cuts in the coming months.

“At today’s meeting the Board judged that, having eased monetary policy at the previous meeting, it was appropriate to hold interest rates steady for the time being,” he said.

“Further easing of policy may be appropriate over the period ahead, in order to foster sustainable growth in demand and inflation consistent with the target. The Board will further assess the case for such action at forthcoming meetings.”

While the decision may not be welcomed by households and businesses looking to borrow, it will please a growing number of commentators who are concerned that low mortgage rates will fuel a housing bubble.

Mr Stevens touched on this issue in his statement today, saying: “Dwelling prices continue to rise strongly in Sydney, though trends have been more varied in a number of other cities over recent months. The Bank is working with other regulators to assess and contain risks that may arise from the housing market.

“In other asset markets, prices for equities and commercial property have risen, in part as a result of declining long-term interest rates.”

The ASX responded badly to the announcement, with the ASX 200 immediately plummeting almost 70 points. That comes after market expectation of a rate cut pushed the sharemarket to a post GFC high yesterday of almost 6000. Just before 3pm it had stabilised at around 5925.

The surest sign that we can expect another rate cut soon came in Mr Stevens’ comments on the value of the Australian dollar, which he said “remains above most estimates of its fundamental value, particularly given the significant declines in key commodity prices.

He went on: “A lower exchange rate is likely to be needed to achieve balanced growth in the economy.”

Cutting the cash rate makes the Australian dollar a less attractive currency to own as it earns less interest, which means currency traders will pay less for it. Hence, a lower cash rate equals a lower Aussie dollar.

Illustrating this point, the Aussie dollar rose to 78.19 US cents shortly after the announcement, from 77.74 US cents.

What the experts say

According to Rob Hogg, senior consultant at Frontier Advisors, the RBA’s decision to keep rates on hold reflects the fact that interest rates are not the underlying problem. Rather, the fundamental problem both domestically and globally is that “animal spirits” are low.

“It’s not really the cost of debt or equity capital that’s the problem,” he says. “It is the reluctance of corporates to invest.” While he says the Reserve Bank can do a lot to stimulate economic activity, “they cannot make a business invest.”

Similarly, he says consumers are opting to save rather than spend, which does not help growth.

John Caelli, general manager of markets at ME Bank, agrees that the problem at the moment is sentiment, both among businesses and consumers.

“Rate cuts are often about giving consumers confidence to spend.” But don’t expect immediate results, he says. “Confidence is a fickle thing. It can take 12 to 18 moths to play through.”

When asked whether banks prefer lower or higher interest rates, he says there is not a lot in it. “Lower rates probably slightly squeeze banking margins. But we wouldn’t have a preference, other than increased housing affordability.”

While avoiding making definitive predictions, both Mr Hogg and Mr Caelli say there is a strong likelihood that there will be further rate cuts either in the April or May RBA board meeting.

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