Tuesday, April 15, 2014

Reserve Bank reassures borrowers that rates are on hold - for now

The Reserve Bank has once again reassured borrowers that interest rates will remain steady until it's convinced the economy is back on track.

In the minutes from its April meeting two weeks ago, the RBA Board said it was "prudent" to leave cash rate unchanged at its historic low of 2.5 percent.

"Members noted that the cash rate could remain at the current level for some time if the economy was to evolve broadly as expected," the minutes say.

"Developments over the past month had not changed that assessment."

The RBA said there had been "further signs that low interest rates were supporting domestic activity."

The cash rate has been slashed by 2.25 percentage points since the RBA's cutting cycle began in late 2011 when the Eurozone debt crisis showed signs of destabilising the global economy.

While the RBA says interest rates are "appropriately configured", many economists believe the central bank is softening borrowers up for a rate rise late this year or early next year.

The April meeting took place before last week's surprise drop in the official unemployment rate to 5.8 percent.

That result is in contrast the the minutes which refer to the March jobless rate of 6 percent and a "labour market that remained weak."

However, the minutes highlight the volatility of monthly jobs data from the Bureau of Statistics from earlier in the year.

"Members noted that while the February data may have overstated the improvement in the labour market, it was also possible that earlier data had overstated the weakness."

The minutes also refer to positive economic indicators with retail sales up 1.2 percent in January, housing prices in March up 10 percent nationwide in March and dwelling investment increasing moderately in the December quarters.

However, it also notes that motor vehicle sales declined in February and business conditions have been "somewhat mixed".

The Board also said while mining investment was down in the period, non-mining business investment was also weaker.

"Businesses were still somewhat reluctant to commit to major investments," the minutes say.

The RBA is also watching a continued easing of economic growth in China and the recent decline in prices for iron ore, steel and coal.