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The RBA has kept the cash rate on hold, despite the Australian economy approaching recessionary levels

Jack Derwin
  • The Reserve Bank of Australia (RBA) has kept the official interest rate on hold in November at 0.75% as signs emerge the economy is underperforming.
  • Despite sales figures showing Australian retail spending has stalled, most economists had anticipated the central bank won't cut to 0.5% until February.
  • AMP Capital chief economist Shane Oliver however is tipping it could come sooner in December.

The economy is weak but rates aren't going anywhere for now.

That's after the Reserve Bank of Australia (RBA) decided to keep rates at 0.75% on Tuesday.

"The main domestic uncertainty continues to be the outlook for consumption, with the sustained period of only modest increases in household disposable income continuing to weigh on consumer spending," RBA governor Philip Lowe said. "Other sources of uncertainty include the effects of the drought and the evolution of the housing construction cycle."

The health of the property markets will continue to be a strong indicator of where the RBA will go next, according to CoreLogic head of research Tim Lawless.

"A rebound in housing values and a rise in buyer activity will hopefully begin to flow through to a gradual improvement in household wealth and spending," Lawless said in a note issued to Business Insider Australia.

"While the improved housing market conditions are a positive for broader economic conditions, an increase in speculative activity from property investors or a slip in the quality of lending standards could be the trigger for a new round of macro-prudential policies aimed at maintaining prudent lending standards and keeping a lid on further accrual of housing related debt," he said.

The move was widely anticipated by the market.

"No economists surveyed by Bloomberg [are] looking for a rate cut," AMP Capital chief economist Shane Oliver tweeted prior to the announcement. "[Market probability] on a cut is just 6% for Nov and 26% for Dec which seems a bit too low."

However, while most of his economic peers are expecting the central bank to cut again at its first meeting next year in February, Oliver is predicting it'll have to go in December.

It comes as a recent spate of data suggests something is rotten in Australia, with the government's tax cuts and the RBA's cash rate cuts failing to put the fire back in the economy, according to BIS Oxford Economics senior economist Sean Langcake.

"The Federal Government’s increased low- and middle-income tax offsets have not provided the immediate boost to retailers that had been hoped for. This is another sign that economic momentum is weaker than had been expected heading into [the] RBA board meeting," he said in a note.

Langcake is referring to Monday's retail growth which underwhelmed, with adjusted sales figures actually declining in the quarter. It spells trouble for the RBA which has pinned its hopes of economic growth to reinvigorated spending and wage growth.

"Spending on discretionary items, such as household goods, remains quite weak reflecting tight budgets and cautious households. Households are dialling back on what they don’t necessarily need – at least not now – so that they can maintain their spending on necessities, such as food and clothing," Indeed Asia-Pacific economist Callam Pickering said on Monday.

"Not since our last recession have we had a retail sector that has struggled so much to get product out the door."

It's a damning indication so far of the government's tax cuts and the RBA last three cuts, according to CBA senior economist Belinda Allen.

"[The] data reinforces that we have seen very little impact from recent stimulus measures," Allen said in a separate note on the figures.

"Certainly at this stage the reaction of the consumer to tax rebates has missed expectations set by the RBA where half of the rebate was expected to be spent and the remainder saved," she said, noting CBA's expectation of a February cut.

The RBA will make its next decision on 3 December.