RBA surprises by maintaining interest rate at 3.25pc

Jon Condon, 07/11/2012


Official bank interest rates will stay at 3.25 percent for at least another month following a decision by the Reserve Bank of Australia at its monthly meeting yesterday to leave cash rates unchanged.

The decision surprised the majority of financial analysts, many of whom had predicted a downwards adjustment.

The RBA decisions saw an immediate rise in currency value, with the A$ soaring another cent to push well into the US 104s yesterday afternoon, putting further pressure on exports, including beef.   

In a statement attached to yesterday’s decision, Reserve Bank governor Glenn Stevens said global growth was forecast to be a little below average for a time.

“Risks to the outlook are still seen to be on the downside, largely as a result of the situation in Europe, where economic activity is still contracting. Risks elsewhere seem more balanced, with the US recording moderate growth, while recent data from China suggests growth there has stabilised,” he said.

Around Asia generally, growth had been dampened by the more moderate Chinese expansion and the weakness in Europe.

Key commodity prices for Australia remained significantly lower than earlier in the year, though trends had been more mixed over the past couple of months, Mr Stevens said. Terms of trade had declined by 13pc since the peak last year, but were likely to remain historically high.


December cut still likely prospect

Westpac chief economist, Bill EvansWestpac chief economist Bill Evans said it did not appear that the RBA’s inflation report would be sufficiently binding to eliminate the possibility of an interest rate move in December.

“This is because the RBA still confirms that inflation will be consistent with the target over the next one to two years. Any qualification of that view would most likely have eliminated the possibility of a December rate cut,” he said.

“The slightly more positive information on the world economy can be put down to an improved assessment of China. The Governor states that recent data from China suggests growth has stabilised."

Mr Evans suggested the RBA’s comments on the domestic economy seemed to be straining to identify good news.

“Some signs of ongoing growth in consumption were identified; some indications of a prospective improvement in investment in dwellings were also noted; while the housing market was described as ‘has strengthened’ and business credit had ‘increased’. All these signs are correct, but the improvement in our opinion is tepid, and should be further boosted with lower rates,” he said.

If the RBA was unprepared to cut rates in November, then what might change by the December 4 meeting?

“There will be no further update on inflation in the meantime, with the next inflation report not due until January 23. We would be surprised to see any sudden developments either to the upside or the downside in the global environment. In fact, our view on China is constructive,” Mr Evans said.

“With inflation and the world economy being attributed as the key drivers of the current decision, it would be reasonable to conclude that the RBA will remain on-hold at least until February next year."

"However we have seen instances like the current one in the past when it has surprised the market, and we believe that it is prudent to assume that if the case is strong in November then it will remain strong in December – although the Bank is likely to respond in a different way,” he said.

Westpac’s view is that interest rates will be cut by 0.25pc at the RBA’s December meeting, to be followed by another cut early in 2013.




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