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RBA leaves interest rates on hold at 2.25 per cent
The Reserve Bank has kept economists on their toes by keeping the official cash rate steady at 2.25 per cent.
While all the economists surveyed about a rate cut expect the Reserve Bank to cut interest rates in 2015, 11 out of 17 had expected a new record low to be announced today.
Commonwealth Bank, ANZ, Westpac and AMP Capital has been among those forecasting a March cut, with the general consensus being the RBA tends to deliver cuts in pairs.
"Usually when they cut rates, they don't just do one out of the blue and stop. It's normally two," Commonwealth Bank senior economist Michael Workman said.
This prediction was made in the context of last month’s rate cut, which was preceded by 18 months of a stable interest rate of 2.50 per cent.
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Australian dollar
The Australian dollar over the last six months. Image: Yahoo7 Finance
Belief that the RBA could cut rates to a record low had the Australian dollar hovering earlier today.
At 0700 AEDT on Tuesday, the local currency was trading at 77.69 US cents, down from 77.76 cents on Monday.
"The RBA is adamant at moving the exchange rate towards the 75 US cent figure and if it maintains a dovish posture today, the Aussie could see more selling as the week progresses," BK Asset Management managing director Boris Schlossberg said.
Australian economy: The vital stats
Unemployment has hit a 12-year high of 6.4 per cent, business investment expectations have reached shockingly weak levels and cheap petrol is expected to push inflation below the RBA's two-to-three per cent target band.
The number of people with jobs fell 12,200 to 11.669 million in January, weaker than the 7,500 jobs increase economists had expected.
Full-time employment fell 28,100 in January and part-time employment was up 15,900, the Australian Bureau of Statistics said on Thursday.
Consumer confidence did however rise 1.5 per cent last week, according to the latest ANZ/Roy Morgan consumer confidence survey.
Meanwhile inflation was flat in February, as rises in prices for fuel and utilities were not enough to overcome falls in fruit and vegetables and holiday travel and accommodation.
The unchanged result in the February TD Securities/Melbourne Institute monthly inflation gauge follows a meagre 0.1 rise in January.
The annual rate of inflation was 1.3 per cent, well below the Reserve Bank's two to three per cent target band.
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The impact to borrowers in each state:
Source: www.ratecity.com.au, ABS housing finance, December. Repayments based on the February 1, 2015 average standard variable rate (5.32%) and assuming lenders pass on one 0.25 percentage point rate cut in full.
House prices
Home price growth is also expected to ease from its recent blistering pace - but not in Sydney.
Capital city home values rose 0.3 per cent in February, seasonally adjusted, slower than the 1.3 per cent recorded in January, the RP Data-Core Logic Home Value Index shows.
The median house price in Sydney has now passed three quarters of a million dollars, and a flat will set you back over half a million.
RP Data research director Tim Lawless said a bleaker economic outlook and declining housing affordability could mean lower interest rates may not give the housing sector the boost it normally would.
"Weaker jobs growth, higher unemployment, declining affordability, low rental yields and political uncertainty are all factors that could dent consumer confidence," he said.
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Business confidence
The reluctance of businesses to borrow funds for growth was thought to be cause enough for another interest rate.
The Reserve Bank's February rate cut, which took the cash rate to 2.25 per cent, had done little to spur business borrowing, a survey by Dun & Bradstreet found.
Just 19 per cent of firms surveyed plan to borrow during the June quarter, compared with 18 per cent a year ago, and Dun & Bradstreet economic adviser Stephen Koukoulas said weak business confidence made another rate cut more likely.
"With expectations for a much needed, sustained upswing in business investment and employment having stalled, it is likely that the RBA will need to provide further monetary policy stimulus in the near term," said Koukoulas.
The poll of 800 business executives, taken during January and February, also found they were less upbeat about employment and profit growth, capital investment and selling prices for the June quarter.
Read more: What to do when interest rates change
Statement by Glenn Stevens, Governor
At its meeting today, the Board decided to leave the cash rate unchanged at 2.25 per cent.
Growth in the global economy continued at a moderate pace in 2014. A similar performance is expected by most observers in 2015, with the US economy continuing to strengthen, even as China’s growth slows a little from last year’s outcome.
Commodity prices have declined over the past year, in some cases sharply. The price of oil in particular has fallen significantly. These trends appear to reflect a combination of lower growth in demand and, more importantly, significant increases in supply. The much lower levels of energy prices will act to strengthen global output and temporarily to lower CPI inflation rates.
Financial conditions are very accommodative globally, with long-term borrowing rates for several major sovereigns at all-time lows over recent months. Some risk spreads have widened a little but overall financing costs for creditworthy borrowers remain remarkably low.
In Australia the available information suggests that growth is continuing at a below-trend pace, with domestic demand growth overall quite weak. As a result, the unemployment rate has gradually moved higher over the past year. The economy is likely to be operating with a degree of spare capacity for some time yet. With growth in labour costs subdued, it appears likely that inflation will remain consistent with the target over the next one to two years, even with a lower exchange rate.
Credit is recording moderate growth overall, with stronger growth in lending to investors in housing assets. Dwelling prices continue to rise strongly in Sydney, though trends have been more varied in a number of other cities over recent months. The Bank is working with other regulators to assess and contain risks that may arise from the housing market. In other asset markets, prices for equities and commercial property have risen, in part as a result of declining long-term interest rates.
The Australian dollar has declined noticeably against a rising US dollar, though less so against a basket of currencies. It remains above most estimates of its fundamental value, particularly given the significant declines in key commodity prices. A lower exchange rate is likely to be needed to achieve balanced growth in the economy.
At today’s meeting the Board judged that, having eased monetary policy at the previous meeting, it was appropriate to hold interest rates steady for the time being. Further easing of policy may be appropriate over the period ahead, in order to foster sustainable growth in demand and inflation consistent with the target. The Board will further assess the case for such action at forthcoming meetings.
