Reserve Bank keeps interest rates on hold at 0.75pc at December meeting

The RBA has held interest rates steady at its final meeting for 2019, but there are growing expectations of a cut early in the New Year.

Reserve Bank of Australia governor Philip Lowe. Picture: AAP

The Reserve Bank has left interest rates unchanged at its monthly board meeting.

In a statement the RBA said it decided to leave the cash rate unchanged at 0.75 per cent.

The widely expected decision to leave policy unchanged came after the RBA cut rates in June, July and October to lift economic growth and lower unemployment to levels consistent with its estimate of full-employment and restore inflation to its target band.

In his statement, RBA governor Philip Lowe said interest rate cuts this year were supporting jobs and wages growth and a return of inflation to the “medium-term target range”.

Shares extended their decline on the news, with the S&P/ASX200 hitting lows of 6710 following the announcement, representing a 2.2 per cent drop for the day.

The wait-and-see approach from the board has prompted a the Australian dollar to liftfrom US68.18c before the news to be trading at US68.37c .

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He also noted that rate cuts had put downward pressure on the exchange rate, supporting activity across a range of industries, and had also boosted asset prices, “which in time should lead to increased spending, including on residential construction”.

“Lower mortgage rates are also boosting aggregate household disposable income, which, in time, will boost household spending”, he added.

“Given these effects of lower interest rates and the long and variable lags in the transmission of monetary policy, the board decided to hold the cash rate steady at this meeting while it continues to monitor developments, including in the labour market,” Dr Lowe said, indicating a stronger resolve to give the effect of its recent interest rate cuts more time to boost the economy.

But he maintained that it was “reasonable to expect that an extended period of low interest rates will be required in Australia to reach full employment and achieve the inflation target.”

Moreover, the so-called “easing bias” of the RBA remained intact.

“The board is prepared to ease monetary policy further if needed to support sustainable growth in the economy, full employment and the achievement of the inflation target over time,” he said.

Ahead of the decision, markets were about 6 per cent priced for a rate cut.

Economic data sincethe October rate cut have mostly been weak, though house prices have jumped and the trade surplus has remained strong. The unemployment rate hit a 16-month high of 5.3 per cent, business conditions and confidence among businesses and consumers alike has remained soft, along with retail sales, investment, construction, building approvals and credit growth, but house prices have risen strongly.

Inflation remained well below target but no lower than the RBA forecast for the December quarter.

National accounts data for the September quarter are due for release on Wednesday.

RBA Governor Philip Lowe has maintained that the economy has reached a “gentle turning point”, although he has conceded that economic growth may not rise as much as forecast, with housing construction potentially softer than expected.

The RBA’s most recent publicly-available economic forecasts in its quarterly Statement on Monetary Policy in November saw growth no better than its estimate of the trend or “potential” growth rate until mid-2021, inflation was forecast to be well below the mid-point of its 2-3 per cent target through to 2021, while unemployment was forecast to be at least 5 per cent until the end of 2021 - well above the 4.5 per cent non-inflation accelerating rate of unemployment calculated by the RBA.

The RBA’s forecasts were conditioned on the technical assumption that the cash rate moved in line with market pricing, implying some chance of a 25 basis point cut by the middle of 2020, which would bring the cash rate to 0.5 per cent.

But after Dr Lowe’s speech on Unconventional Monetary Policy last month, the market was fully expecting a 0.5 per cent cash rate by May, while also seeing some chance of a 0.25 per cent cash rate by year end.