Rates on HOLD – Widely Anticipated Call by the RBA

The Reserve Bank of Australia yesterday announced the Cash Rate Target will remain at 2.00%. This announcement was in line with the expectations from Australia’s big four Banks.

The pertinent points in the RBA’s accompanying statement were:

  • Cash Rate target unchanged at 2.0%
  • Global financial conditions remain very accommodative
  • Inflation low and should remain low
  • Monetary policy needs to be accommodative
  • Inflation affords scope to cut if needed
  • Prospects for better economy have firmed
  • Australian economy continuing to expand moderately
  • Supervisory steps helping contain housing market risks

Yesterday saw a few first times that I thought worthy to mention. This was the RBAs first announcement since Malcolm Turnbull became Prime Minister last month and a long standing Melbourne Cup record was broken with Michelle Payne riding Prince of Penzance across the line first in a field of 24 horses. Michelle is the first female jockey to be achieve this illustrious and highly coveted title. Congratulations to Michelle, Darren Weir the trainer, the owners and all the punters that picked a winner or two yesterday throughout the day.

The Reserve Bank of Australia has decided to leave the official cash rate at 2 per cent as most analysts had predicted. This being the first monthly board meeting since the big four banks raised their mortgage rates independently of the RBA.

While all four major banks raised their owner-occupier rates last month, 24 of the 30 economists and commentators surveyed by finder.com.au had expected the cash rate to remain on hold. The other six forecast a rate cut.

Many people have assumed that the next move in the cash rate would have to be up given that it is now at a record-low setting following 0.25 per cent reductions earlier this year in February and May.

However, it now seems increasingly possible that the cash rate could fall even lower.

The survey found that 13 of the 30 respondents expect further cuts, with eight predicting a low of 1.75 per cent and five predicting a low of 1.5 per cent.

Another rate cut would also provide a boost to Australia’s sluggish economy that seems to be muddling along in line with the global economy.

We had thought another rate cut was unlikely as it would exacerbate the housing booms in Sydney and Melbourne. However, the RBA could now have room to move, with Sydney’s boom apparently at an end, and a significant slowdown in Melbourne with even further slowing forecast.

Auction clearance rates have been steadily declining throughout the month of October in Sydney, Melbourne and Brisbane.

The outlook on inflation is also supportive – the inflation rate is running at 1.5 per cent, which is well below the RBA’s target band of 2-3 per cent.

The RBA said:

“While GDP growth has been somewhat below longer-term averages for some time, business surveys suggest a gradual improvement in conditions over the past year. This has been accompanied by somewhat stronger growth in employment and a steady rate of unemployment.”

“Inflation is low and should remain so, with the economy likely to have a degree of spare capacity for some time yet. Inflation is forecast to be consistent with the target over the next one to two years, but a little lower than earlier expected.”

The RBA will meet for the last time next month in December then not again until February 2016, would a rate cut be a great Christmas present to all Australian Households?

For more information watch the Macquarie Bank November 2015 interest rate report below – “rates on hold at 2.0%”