RBA “hibernation” looms as interest rates remain on hold

The Reserve Bank has decided to keep interest rates on hold, with an analyst suggesting that monetary policy could go into “hibernation” this winter.

At its meeting today, the RBA decided to leave the cash rate unchanged at 3.5%, following consecutive cuts in May and June totaling 75 basis points.

According to RBA governor Glenn Stevens, growth in the world economy picked up in the early months of 2012, having slowed in the second half of 2011, although conditions remain fragile.

“Recent indicators continue to suggest weakening in Europe and a slower pace of growth in China,” Stevens said.

“Conditions in other parts of Asia have recovered from the effects of last year’s natural disasters, but the ongoing trend is unclear and could be dampened by the effects of slower growth outside the region.”

“The United States continues to grow at a modest pace… but Europe will remain a potential source of adverse shocks for some time.”

In Australia, Stevens said recent data suggests the economy continued to grow in the first part of 2012, at a pace “somewhat stronger” than had been indicated earlier.

“Labour market conditions also firmed a little, notwithstanding job shedding in some industries; the rate of unemployment remains low,” Stevens said.

Stevens said there have been no changes to the RBA’s outlook for inflation.

“Over the coming one to two years, and abstracting from the effects of the carbon price, inflation is expected to be consistent with the target,” he said.

“Maintaining low inflation over the longer term will, however, require growth in domestic costs to slow as the effects of the earlier exchange rate appreciation wane.”

Stevens said business credit has increased more strongly in recent months, although credit growth remains modest overall. Meanwhile, the housing market remains subdued.

“As a result of the sequence of earlier decisions, there has been a material easing in monetary policy over the past six months,” he said.

“At today’s meeting, the board judged that, with inflation expected to be consistent with the target and growth close to trend, but with a more subdued international outlook than was the case a few months ago, the stance of monetary policy remained appropriate.”

Loan Market spokesperson Paul Smith said it was no surprise to see the RBA maintain the cash rate at 3.5% after reductions in May and June.

Smith said the RBA is likely to keep official rates on hold over the coming months, even though consumer sentiment remains subdued.

“The RBA could stay in hibernation over the winter after back-to-back monthly reductions in May and June,” he said.

“While the RBA sleeps, consumers will still be nervous about the financial situation in Europe and the direction of the domestic economy.”

“The impact of the carbon tax is another great unknown, particularly how it will affect consumer behaviour in the months ahead.”

Smith said the RBA will be under pressure to lower rates further this year, insisting it has “plenty of room” to combat further economic slowdown in various sectors.