RBA leaves interest rates on hold

The Reserve Bank has surprised the business sector with today’s announcement that the official cash rate will remain unchanged at 4.25%, insisting the situation in Europe is improving.

A third consecutive rate cut was widely tipped at today’s RBA board meeting, but it seems the global and national economies aren’t hurting enough just yet.

Financial markets had judged there was an 80% prospect of a 25-basis-point cut.

“The acute financial pressures on banks in Europe were alleviated considerably late in 2011 by the actions of policymakers,” RBA governor Glenn Stevens said in a statement.

“Much remains to be done to put European sovereigns and banks on a sound footing, but some progress has been made.”

“Financial market sentiment, though remaining skittish, has generally improved since early December.”

According to Stevens, information on the Australian economy continues to suggest growth close to trend, with differences between sectors. He also touched on the Australian job market.

“Labour market conditions softened during 2011 and the unemployment rate increased slightly in mid year, though it has been steady over recent months,” he said.

“CPI inflation has declined as expected, as the large rises in food prices – resulting from the floods a year ago – have been unwinding.”

“Year-ended CPI inflation will fall further over the next quarter or two. In underlying terms, inflation is around 2.5% per cent.”

“Over the coming one to two years, and abstracting from the effects of the carbon price, the bank expects inflation to be in the 2-3% range.”

Stevens said while credit growth remains modest, there has been a slight increase in demand for credit by businesses. Meanwhile, housing prices showed signs of stabilising at the end of 2011.

He also points out that the exchange rate has risen further, even though the terms of trade have started to decline.

“This is largely a reflection of a decline in the euro against all currencies,” Stevens said.

“Nonetheless, the Australian dollar in trade-weighted terms is somewhat higher than the bank had previously assumed.”

“At today’s meeting, the board noted that interest rates for borrowers have declined to be close to their medium-term average, as a result of the actions at the board’s previous two meetings.”

“With growth expected to be close to trend, and inflation close to target, the board judged that the setting of monetary policy was appropriate for the moment.”

Damian Smith, of financial comparison site RateCity, says borrowers should demand a rate cut from their lender despite the RBA’s decision to leave the cash rate unchanged.

“Borrowers shouldn’t be disheartened that the Reserve Bank kept the cash rate at 4.25% today because the sluggish home loans market means the ball is in your court,” Smith says.

“We’re seeing lenders offering discounts of up to 1% off their standard variable rates for basic home loans.”

“Many lenders – including the big four banks – have said they are willing to negotiate to retain their share of the home loan market.”