RBA leaves interest rates on hold at 2.5 per cent

THE Reserve Bank has given Australians a Christmas reprieve, leaving interest rates on hold at a historic low. But a cut may be on the horizon.

The Reserve Bank Of Australia (RBA) in Martin Place, Sydney on Thursday, March 9, 2012. (AAP/Joel Carrett) NO ARCHIVING

FOR Australians already staring at big shopping bills over Christmas, the Reserve Bank has given them another reprieve.

The RBA has left official interest rates on hold at a historic low of 2.5 per cent. The cash rate has been left on hold for 16 months. It last moved in August 2013.

The consensus among economists was that interest rates would remain unchanged until next year. Most economists expect there will an increase next year. However, but as growth in the housing has slowed, there is even talk of a potential rate cut next year.

Deutsche Bank chief economist Adam Boyton says the RBA will cut the cash rate to a fresh low of 2.25 per cent toward the end of the June quarter before reducing it to two per cent, sometime around September or October.

“Are things going to get better over the next year or two than they have been over the past year or two? We don’t think so,” Mr Boyton told AAP.

“It’s just that combination of some early signs of cooling in house price growth, weaker commodity prices over the past few months, combined with our expectation that the unemployment rate will rise to close to seven per cent next year.

We may see cuts next year.

“All of those things mean that on balance, we think rate cuts next year are more likely than not.” Mr Boyton said the strong housing market had previously prevented the bank’s economists from forecasting rate cuts.

But easing house price growth and talk of regulations to cool investor activity in the property market, combined with forecasts of rising unemployment and declining commodity prices in 2015, led the bank to change its view, he said.

Deutsche Bank is the latest international firm to forecast rate cuts in 2015, after US-based funds manager AllianceBernstein last week said the next move in interest rates was likely to be downward.

Last month, Steen Jakobsen, chief economist at the Denmark-based Saxo Bank, told AAP the cash rate would need to be cut to two per cent but possibly as low as 1.5 per cent, as Australia heads into recession.

But the majority of economists still think the RBA’s next move will be a rate hike, either in 2015 or 2016, according to a recent AAP survey.

In a statement accompanying the RBA’s decision, governor Glenn Stevens said economic indicators showed that growth will stay moderate.

“Resources sector investment spending is starting to decline significantly, while some other areas of private demand are seeing expansion, at varying rates,” he said.

“Overall, the Bank still expects growth to be a little below trend for the next several quarters.” Mr Stevens noted that the Australian dollar has fallen further recently but that was largely due to the strengthening US dollar. “The Australian dollar remains above most estimates of its fundamental value, particularly given the significant declines in key commodity prices in recent months,” he said.

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

Originally published as RBA leaves interest rates on hold at 2.5 per cent