Central bank keeps interest rates on hold at record low

THE RBA has kept interest rates on hold despite rising inflation, stronger-than-expected retail sales and a brewing housing boom.

THE RBA has kept interest rates on hold despite rising inflation, stronger-than-expected retail sales and a brewing housing boom.

At its second board meeting of the new financial year, the central bank kept the cash rate at 2.50 per cent for the 12 consecutive month, the longest and lowest period of rate stability in decades.

RBA governor Glenn Stevens said in a statement mirroring July’s tone that “the most prudent course is likely to be a period of stability in interest rates”.

Continued low interest rates were expected to help growth strengthen over time, although growth was forecast to be “a little below trend over the year ahead”, Mr Stevens said.

The statement noted that there are signs of ‘moderate growth’ in consumer demand and a ‘strong expansion in housing construction’, while at the same time the ‘resources sector investment spending is starting to decline significantly’.

The board’s decision was widely predicted. All 15 economists surveyed by AAP forecast the cash rate to remain at 2.5 per cent today, and only one believes it will increase before Christmas.

Most pundits predict the Reserve Bank to go 18 months without a change, but a string of hikes are expected in the new year.

The RBA last altered the rate in August 2013, cutting it by a quarter of a percentage point.

HSBC Australia chief economist Paul Bloxham says that economic growth lost some pace in the June quarter, which would leave an interest rate hike off the table in 2014.

“Part of the reason is simply that the pace of the recovery around the turn of the year was unlikely to be sustained, but it also reflected the sharply negative effect the government’s May budget had on consumer sentiment,” Mr Bloxham says.

“Consumer sentiment has bounced back strongly in recent weeks, and business sentiment, which was largely unaffected by the Budget, remains at levels consistent with rising domestic demand.”

Michelle Hutchison, finder.com.au’s money expert says the cash rate is likely to move up to a “new normal” of about 4 per cent next year.

Ongoing low rates will continue to ignite loan book wars between lenders, she says.

“Lenders are fighting harder than ever to win over new customers, particularly for products such as home loans and credit cards, which is great news for borrowers,” Ms Hutchison said.

The big four banks have lost market share by 1 percentage point for owner-occupied home loans since July last year, she says.

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Originally published as Central bank keeps interest rates on hold at record low