Reserve Bank decision shows rate cuts on hold for the time being

Rate cuts are on hold for now, with senior economists predicting only modest rate cuts towards the end of the year, after the Reserve Bank board yesterday opted to leave the cash rate unchanged at 3.5%.

The decision follows a 0.25% rise in June.

Economists at ANZ are forecasting 0.25% cuts in October and November, with the strong possibility of 75 basis points to be cut by the end of the year, while Westpac has pencilled in 0.25% cuts in August and September, with a final 0.25% cut in the December quarter.

ANZ senior economist Justin Fabo told SmartCompany the RBA is faced with the “unfavourable global backdrop” of the European debt crisis and slowed growth in China.

“And within Australia, although the mining boom is well entrained, the rest of the economy is moving much more modestly,” he says.

Fabo says a possible easing of the cash rate in coming months could give “more impetus” to business than expected, but that there’s currently “no big appetite for debt”.

In its July Economic update yesterday, ANZ said it had changed its official interest rates call to no move in August, but maintains “rates are likely to be 50 basis points lower before year-end.”

“Given the RBA’s recent neutral tone we now do not expect the Bank to cut rates in August (absent a sharp deterioration again in the European situation) but feel that further modest easing of policy will be necessary towards the end of this year,” the bank said.

“This view is based on a confluence of factors: the sub-trend global growth outlook; ongoing sub-par growth in Australia’s non-mining sectors; a likely pick-up in underlying productivity growth which should keep inflation pressures in check; and a continuation of the modest appetite for debt among households which should limit the risk of house prices accelerating.”