Reserve gives borrowers interest rate reprieve

Updated

Sorry, this video has expired Video: RBA takes moderate path with unchanged rates (Lateline Business)

The Reserve Bank has given borrowers a reprieve by keeping interest rates on hold at 4.75 per cent.

Interest rates have now been on hold for the past nine months - Reserve Bank governor Glenn Stevens said in a recent speech that Australia is in the most stable period for interest rates in the past five years.

The decision to leave rates on hold did not come as a surprise to most forecasters, with 21 out of 25 economists surveyed by Bloomberg expecting rates to remain steady.

Most analysts predicted that ongoing sovereign debt issues in the US and Europe, combined with unrelenting weak economic data across most sectors of the Australian economy, would stay the RBA's hand, at least for another few months.

That assessment was proved correct in the post-meeting statement by Reserve Bank governor Glenn Stevens.

"On balance, the board judged that it was prudent to maintain the current setting of monetary policy, particularly in view of the acute sense of uncertainty in global financial markets over recent weeks," he noted.

However, it seems any reprieve will be temporary with Mr Stevens warning that the Reserve is keeping a close eye on inflation.

He says the headline Consumer Price Index figure should fall as flood effects wane, however he adds that the recent rise in underlying measures of inflation is a concern.

"Measures that give a better indication of the trend in inflation have begun to rise over the past six months, after declining for the previous two years," Mr Stevens noted.

"While they have, to date, remained consistent with the 2-3 per cent target on a year-ended basis, the board remains concerned about the medium-term outlook for inflation."

Despite the threat of further rate increases, the Australian dollar still eased from 109.82 US cents just before the release to 109.2 US cents around 3:15pm (AEST).

'Degree of restraint'

That may be partly explained by Mr Stevens emphasising that the current level of interest rates was already exerting a "degree of restraint" on borrowing and consumer spending.

Recent RBA figures showed home borrowing was growing at the slowest annual pace since the data began being collected in the late 1970s.

UBS chief economist Scott Haslem says the Reserve Bank also seems to be showing a greater willingness to live with slightly higher inflation in the face of very weak domestic economic data and global financial stability threats.

"On balance, we continue to look for a rate hike over coming months, but the RBA has signalled some willingness to hold fire if there is further deterioration in the outlook," he wrote in a note.

RBC Capital Markets senior economist Su-Lin Ong says her prediction of a November rate rise depends entirely on the global economic situation stabilising.

"We continue to premise our modest tightening profile very heavily on global developments and there's no doubt that that is dominating RBA thinking at the moment," she told Reuters.

"If the globe is still looking like this in the fourth quarter, they are still not going to move."

Economists are now looking towards the Reserve Bank's quarterly Statement on Monetary Policy, released this Friday, to give further information about the RBA's thinking, and possible hints about where rates are heading.

'No brainer'

Industry groups warmly welcomed the Reserve Bank's decision to keep official interest rates at 4.75 per cent.

"The decision was a no-brainer. It will be received with relief by the bulk of the Australian economy which is experiencing tough trading conditions," said Australia Industry Group chief executive Heather Ridout.

The housing industry also welcomed the continued interest rate stability on a day when Bureau of Statistics figures showed building approvals has slumped again in June.

“In times of heightened economic uncertainty the normal 'rules' shouldn't apply, and keeping rates on hold is the course the RBA should continue to steer in 2011," said the HIA's chief economist Dr Harley Dale.

“With fragile business and consumer confidence, the damage that could be wrought to the economy by lifting interest rates far outweighs any supposed risk of holding fire."

The HIA says, even with rates on hold, there is a increasing likelihood that 2011-12 will be the weakest period for new home building in the past fifteen years, excluding the worst slumps during the financial crisis and after the GST introduction.

Topics: business-economics-and-finance, economic-trends, money-and-monetary-policy, international-financial-crisis, australia

First posted