Reserve Bank leaves official cash rate on hold at 2.5 per cent

THE Reserve Bank has opted to leave the official cash rate on hold at 2.5 per cent in May in a move that was widely expected by markets.

Reserve Bank Governor Glenn Stevens pictured in Brisbane.

THE Reserve Bank has opted to leave the official cash rate on hold at a record low of 2.5 per cent in May.

The move is in line with market expectations, with seven out of 15 economists surveyed saying they thought rates would stay on hold. Three forecast a cut to a new low of 2.25 per cent while five forecast hikes later in the year.

The RBA board believes monetary policy is “appropriately configured” to foster sustainable growth in demand and inflation within the bank’s target range of two to three per cent, governor Glenn Stevens said in a statement.

“On present indications, the most prudent course is likely to be a period of stability in interest rates,” he said.

The most recent interest rate movement was a quarter of a percentage point cut in August.

Mr Stevens noted concerns about Chinese growth, but said outcomes for other countries appear to be improving.

“China’s growth appears to have slowed a little in early 2014 but remains generally in line with policymakers’ objectives,” he said.

“Commodity prices in historical terms remain high, though some of those important to Australia have softened further of late.” Local economic conditions have improved, with credit growth and housing prices picking up thanks to record low interest rates, Mr Stevens added.

However, the employment market is still quite weak and the exchange rate is still quite high, he said.

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

The statement from Mr Stevens was little changed from the previous month, although the central bank’s outlook on the labour market had improved, Commonwealth Bank chief economist Michael Blythe said.

“That period of stability on interest rates is set to continue for a while yet,” he said.

“What is interesting are a few indications that they’re a little bit more positive on the labour market and also a little bit more comfortable on the inflation outlook.” It also appeared the RBA’s concern with the high Australian dollar had shifted towards rising house prices, Mr Blythe said. “The jawboning has shifted to the housing market and away from the currency,” he said.

“I think they’ve acknowledged that jawboning the Australian dollar works when the currency is heading in the right direction but it’s obviously reversed course for a range of reasons and jawboning doesn’t work in that sort of environment.”

AMP chief economist Shane Oliver expects the cash rate to finish 2014 at three per cent but says that will depend on whether or not the federal government delivers a “slash and burn” budget.

“In four or five months, I think there will be enough evidence that the economy has picked up and, therefore, the case will have built for the RBA to start normalising interest rates. But, that is contingent on the government not getting too aggressive with fiscal austerity,” Dr Oliver said.

RP Data national research director Tim Lawless said the nation’s housing markets are starting to return to more sustainable levels.

“The ongoing low interest rate environment is likely to encourage higher levels of housing market activity which provides a fantastic multiplier for the Australian economy; however we anticipate that natural affordability barriers and low rental yields will continue to dampen the exuberance that has been very much evident in Sydney and Melbourne.”

Originally published as Reserve Bank leaves official cash rate on hold at 2.5 per cent