Reserve Bank leaves interest rates on hold at 2.25pc

Updated

The Reserve Bank has left interest rates steady at a record low 2.25 per cent, disappointing many traders who had priced in an April rate cut.

After a somewhat surprising 25-basis-point rate cut in February, the RBA has now left rates steady for two months in a row.

Today's move perplexed many traders, with markets pricing in a 75 per cent chance of rates being cut this month.

The surprise saw the Australian dollar shoot up from below 76 US cents to a high of 77 shortly after the announcement at 2:30pm (AEST).

It also lifted the local currency decisively away from parity with the New Zealand dollar - the Australian dollar had fallen as low as 100.6 New Zealand cents, but jumped to 101.98 shortly after the RBA decision.

Bank economists had been less convinced of the chances of a cut, with a small majority (17) of the 30 surveyed by Bloomberg expecting rates to stay on hold in April.

However, many of those not forecasting a rate cut in April are forecasting one for May.

"The 25 per cent drop in iron ore in the last month has not been enough to push them at this point in time, but ultimately it will," RBC Capital Markets senior economist Su-Lin Ong told Reuters.

"The drop in the terms of trade and the implications for national income and growth will see some further easing."

Financial markets are currently pricing in a near certainty of at least one more rate cut, with only a 2.6 per cent chance that rates will end this year at 2.25 per cent, and a high likelihood of two or more cuts.

According to the RBA's most recent figures, average standard variable mortgage rates with banks are at 5.65 per cent while discounted rates sit around 4.8 per cent.

Real estate analysis firm CoreLogic RP Data said those mortgage rates were already the lowest since 1968.

It has attributed at least part of a further jump in auction clearance rates and other property market indicators to February's rate cut - the firm's home price index jumped in March on the back of a 3 per cent monthly surge in Sydney.

Real estate remains a concern

Residential real estate prices and mortgage lending clearly remained matters of concern at today's meeting, although the RBA noted that housing lending appears to have stabilised, albeit at strong growth rates.

"Dwelling prices continue to rise strongly in Sydney, though trends have been more varied in a number of other cities," Reserve Bank governor Glenn Stevens noted in his post-meeting statement.

"The bank is working with other regulators to assess and contain risks that may arise from the housing market."

In that context, interest rate comparison website Finder's money expert Michelle Hutchison said today's decision to leave interest rates steady was actually better for would-be home buyers.

"The past year saw the median property price increase by 7.4 per cent to $559,000 (CoreLogic RP Data). If first home buyers have to borrow over $38,000 more for an average property – from $520,484 to $559,000 – the higher property price would outweigh the last rate cut," she said.

"In fact, even if there was another cash rate cut, it won't outweigh the extra cost in monthly repayments if you paid $38,000 more for a property."

RateCity said savers have also been given somewhat of a reprieve by today's decision, with its data showing bonus savings accounts from the major banks have seen their deposit rates cut by 0.78 percentage points on average over the past year, despite just 25 basis points in official rate cuts.

However, any reprieve might be short-lived, with Mr Stevens saying the board is still open to more rate cuts.

"Further easing of policy may be appropriate over the period ahead, in order to foster sustainable growth in demand and inflation consistent with the target," he added.

Topics: money-and-monetary-policy, economic-trends, banking, housing-industry, australia

First posted