Tuesday, February 18, 2014

Reserve Bank says "little chance" of a change in interest rates

Interest rates look set to remain on hold for the rest of the year as deep cuts to the official cash rate work their way through the economy.

In the minutes from its February board meeting, the Reserve Bank said there was "little chance of a change in monetary policy at present."

"If the economy evolved broadly as expected, there would likely be a period of stability in interest rates," the minutes say.

Board members signalled that the rate cutting strategy had most likely ended and said "it was prudent to keep policy unchanged while assessing the continuing impact of that stimulus."

The cash rate was left steady at 2.5 percent at the February meeting, having fallen steadily from a recent peak in November 2011 of 4.75 percent.

The RBA is now seeing evidence that the rate cuts are working with more timely indicators having been more positive for consumption, dwelling investment, business conditions and exports.

The board meeting took place on February 4, before the official unemployment reading for January rose unexpectedly to six percent - the highest level in more than decade.

Before the shock jobs result, many economists predicted the Reserve Bank's next rate movement would be up.

However, now most agree the cash rate will remain steady for a long period before the RBA makes a move.

The minutes also show the RBA debated reasons for the last ABS inflation reading coming in higher than expected at 0.9 percent in the December quarter and 2.7 percent annualised.

The RBA believes there are "several possible explanations" but believes "noise" had presented "something of a puzzle in interpreting the mix of activity and price data".

That could mean the RBA is not overly concerned about rising inflation putting pressure on the steady cash rate.

The minutes do not mention concerns about the possibility of a housing bubble in the big real estate markets of Sydney and Melbourne.

However, the RBA noted that "the effects of low interest rates were clearly evident in the housing market."

The Reserve Bank said late last year that talk of a housing bubble was "excessively alarmist."

The board noted the impact of lower rates on the value of the Australian dollar which was 15 percent below its most recent peak of early 2013.

The Australian dollar was buying 90.55  US cents after the release of the January minutes.

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