RBA leaves interest rates unchanged for February

February 5, 2013, 2:30 pmYahoo7

Mortgage holders hoping the official cash rate would drop below three per cent are going to have wait just that little bit longer.

With official interest rates already at record lows and the full-effect of previous cuts yet to flow through the economy, the RBA has decided to hold the official cash rate steady at three percent in its meeting today.

Even though Australians have become accustomed to constant interest rate cuts, those mortgage holders hoping the official cash rate would drop below three per cent are going to have wait just that little bit longer.

Experts had predicted the RBA would not move today with a survey of 15 economists showing that all but one had expected the RBA to keep official interest rates steady.

The biggest changes since the RBA's last meeting in December have been in markets with the ASX200 growing some 10 per cent in the past two months, while iron ore prices have rebounded some 35 per cent.

“The numbers out of China have been very positive and even US numbers have been very supportive of the Reserve Bank leaving rates on hold,” said CommSec economist Savanth Sebastian.

“It seems likely that they'll keep rates on hold for the first six months of this year.”

Even though the latest inflation figures were low enough to allow the RBA to cut if they had wanted to, there has already been two interest rate cuts in the past four months.

"Particularly compared with a year ago, cash rates are 125 basis points lower than they were a year ago and so I think the RBA are very relaxed and comfortable and should leave the cash rate where it is at 3 per cent," said TD Securities head of Asia-Pacific research, Annette Beacher.

Could rates still come down in 2013?

However, most of the pressures that led to the Reserve moving rates to what it called “emergency” levels still persist, and it is too early to conclude that the easing cycle has finished.

While home prices have rebounded slightly in the past couple of months, building approvals have unexpectedly fallen and job ads have been in decline for the past 11 straight months.

If the labour market continues to deteriorate the bank could open a fresh round of rate cuts.

The underlying fear being that once resource investment passes its peak there is not enough happening in other sectors of the economy to keep things moving along.

Governor's statement

At its meeting today, the Board decided to leave the cash rate unchanged at 3.0 per cent.

Global growth is forecast to be a little below average for a time, but the downside risks appear to have abated, for the moment at least.

The United States has so far avoided a severe fiscal contraction and financial strains in Europe have lessened considerably over recent months. Growth in China has stabilised at a fairly robust pace.

Around Asia generally, growth was dampened by the earlier slowing in China and the weakness in Europe, but again there are signs recently of stabilisation. Some commodity prices have firmed over recent months.

Sentiment in financial markets has continued to improve, with risk spreads narrowing and funding conditions for financial institutions becoming more favourable. Long-term interest rates faced by highly rated sovereigns, including Australia, remain at exceptionally low levels.

Borrowing conditions for large corporations are very attractive. Share prices have made further gains. However, the task of putting private and public finances on sustainable paths in several major countries is far from complete and, accordingly, financial markets remain vulnerable to setbacks in these areas.

In Australia, most indicators available for this meeting suggest that growth was close to trend in 2012, led by very large increases in capital spending in the resources sector, while some other sectors experienced weaker conditions.

Looking ahead, the peak in resource investment is approaching. As it does, there will be more scope for some other areas of demand to strengthen.


HSBC Australia chief economist Paul Bloxham said it appeared the RBA was waiting for recent interest rate cuts to flow through to the economy.

"The RBA is still waiting to see the effects of the previous cuts they have delivered and that is clear in the statement," he said.

"It looks as though they are going to stay on hold for the moment."

Mr Bloxham said that while the RBA's statement left the possibility of further rate cuts open, he did not expect any further reductions in the cash rate this year.

"I think they have hinted at a mild easing bias but we think the easing cycle is done," he said.

He said global economic conditions had improved and believed the rate cuts delivered in 2012 would provide a boost to the domestic economy over the coming months.

"The global economy has stabilised, the China story has picked up and policy settings in Australia are already conducive to supporting growth," he said.

The three per cent cash rate will probably remain in place for the rest of the year as Europe, the US and Asia show evidence of recovery, Commonwealth Bank's chief economist Michael Blythe said.

"With low inflation and plenty of risks in Europe and elsewhere, it's unlikely there will be any need to start lifting rates any time soon," Mr Blythe told AAP.

"We're at a low and that low will be in place for an extended period, I would think really through 2013."

He said the determinant would be whether the Reserve Bank would be successful in engineering a growth rotation away from the mining sector.

"As the mining story winds down, can we gets bits of the non-mining economy moving?

"Based on what they're saying today, that seems to be happening," Mr Blythe said.

UBS interest rate strategist Matthew Johnson said while the decision to put rates on hold was expected, the bank's risk outlook was interesting.

"The RBA is saying this is going to be a generational project in terms of fixing the fiscal situation, so the risks are going to be around for a while," he said.

"They have abated for the moment but they're going to be with us for some time."

Mr Johnson said the RBA made it clear that there's scope to ease policy if it's required to support demand.

"So maybe they're putting the focus now on demand and we should look for them to ease, not around the inflation reports but around the time GDP comes out in March, the last month's of the quarter," he said.

Mr Johnson added that the bond futures market moved slightly higher on the announcement.

Futures market are now pricing in a 47 per cent chance of an interest rate cut in March, compared to a 57 per cent chance prior to Tuesday's cash rate announcement.

RBC capital markets fixed interest strategist Michael Turner said the statement shows the RBA is a little more upbeat about the local and global economy.

"There's a slightly more positive tone around the globe, as you'd expect. They may be a tiny bit more confident with certain parts of the domestic economy, in particular the housing market," he said.

"More importantly they are looking at below trend growth and inflation for this year, giving them scope to ease, should they deem it necessary.

"We're not sure there is much in this statement that represents a change in their thinking since December."

Mr Turner said he is not expecting another interest rate cut until the April to June quarter of 2013.

"Our view since the December cut is that they will need to see some domestic data prints on the low side of expectations for a few weeks, if not for a couple of months, for them to put another rate cut on the table," Mr Turner said.

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