RBA leaves rates on hold

The Reserve Bank has decided to keep interest rates on hold at 2.0 per cent at its first board meeting of 2016.

The announcement, which is the seventh consecutive time the RBA has opted to leave rates unchanged, is in line with economist’s expectations that the Reserve Bank would not budge from its neutral interest rate stance.

Also read: $A boosted ahead of RBA rate decision

Following the RBA’s previous announcement to leave the cash rate unchanged at its December meeting, academics and economists predicted there would be no movement in the cash rate in the foreseeable future.

Despite a worrying start to the year for Aussie stocks and the currency, Australia's economy has generally travelled well during the opening month of 2016.

Also read: Aussie economy gets 'adrenaline shot' from falling dollar

Peter Boehm, finance editor at onthehouse.com.au, said the RBA’s decision to hold rates today confirms the widely held view that now is not the time to make any changes.

“This is supported by a reasonable stable housing market, some positive news on China’s response to its economic slowdown, good consumer spending over the Christmas/New Year period, a reasonable outlook on employment, inflation at acceptable levels and increased confidence in our political leadership,” he said.

Tim Lawless, head of research at CoreLogic RP Data, agrees that while there are plenty of reasons why the RBA may have contemplated cutting the cash rate – Australia’s terms of trade are approaching ten-year lows mostly due lower export prices, inflating is tracking at the bottom of the target range and the Aussie dollar has seen some upwards pressure – the housing market is playing out exactly as the RBA probably hoped, by losing steam without a collapse in values.

Also read: How will the Aussie economy perform in 2016?

The last three months have seen capital city dwelling values drift 0.6 per cent lower and capital city home values are up by only 0.7 per cent over the past six months. 

“The RBA probably doesn’t need to worry too much about over stimulating the housing market via another rate cut; mortgage rates are already higher than a year ago due to the higher capital requirements implemented by APRA and the pace of investment growth has fallen below APRA’s 10 per cent speed limit imposed in December 2014,” Lawless said.

“Other factors adding to the hold argument were likely to have been around labour markets which have been showing a healthy trend based on the Bureau of Statistics data and retail sales showing a better appetite for households to spend.”

Also read: Blip or crisis? What 2016's horror start really means

Both Lawless and Boehm agree that heat in the housing market no longer likely to be a major concern for the RBA and that it is likely we won’t see any changes to the official cash rate until a potential move later in the year.

 

Glenn Stevens, Governor: Monetary Policy Decision

"Recent information suggests the global economy is continuing to grow, though at a slightly lower pace than earlier expected. While several advanced economies have recorded improved growth over the past year, conditions have become more difficult for a number of emerging market economies. China's growth rate has continued to moderate.

"Commodity prices have declined further, especially oil prices. This partly reflects slower growth in demand but also very substantial increases in supply over recent years. The decline in Australia's terms of trade, which began more than four years ago, has therefore continued.

"Financial markets have once again exhibited heightened volatility recently, as participants grapple with uncertainty about the global economic outlook and diverging policy settings among the major jurisdictions. Appetite for risk has diminished somewhat and funding conditions for emerging market sovereigns and lesser-rated corporates have tightened. But funding costs for high-quality borrowers remain very low and, globally, monetary policy remains remarkably accommodative.

"In Australia, the available information suggests that the expansion in the non-mining parts of the economy strengthened during 2015 even as the contraction in spending in mining investment continued. Surveys of business conditions moved to above average levels, employment growth picked up and the unemployment rate declined in the second half of the year, even though measured GDP growth was below average. The pace of lending to businesses also picked up.

"Inflation continues to be quite low, with the CPI rising by 1.7 per cent over 2015. This was partly caused by declining prices for oil and some utilities, but underlying measures of inflation are also low at about 2 per cent. With growth in labour costs continuing to be quite subdued as well, and inflation restrained elsewhere in the world, consumer price inflation is likely to remain low over the next year or two.

"Given these conditions, it is appropriate for monetary policy to be accommodative. Low interest rates are supporting demand, while regulatory measures are working to emphasise prudent lending standards and so to contain risks in the housing market. Credit growth to households continues at a moderate pace, albeit with a changed composition between investors and owner-occupiers. The pace of growth in dwelling prices has moderated in Melbourne and Sydney over recent months and has remained mostly subdued in other cities. The exchange rate has continued its adjustment to the evolving economic outlook.

"At today's meeting, the Board judged that there were reasonable prospects for continued growth in the economy, with inflation close to target. The Board therefore decided that the current setting of monetary policy remained appropriate.

"Over the period ahead, new information should allow the Board to judge whether the recent improvement in labour market conditions is continuing and whether the recent financial turbulence portends weaker global and domestic demand. Continued low inflation may provide scope for easier policy, should that be appropriate to lend support to demand."