• 14/06/2024

Reserve Bank flags period of interest rate stability at 2.5 per cent

By Michael Janda | 4 February 2014


The Reserve Bank has left interest rates on hold, and says that is where they are likely to stay for some time.

The official cash rate target has now been steady at 2.5 per cent for the past six months, after the RBA last cut its benchmark rate by 25 basis points in August. Today’s decision marks the longest period of interest rate stability since the RBA left rates on hold at 4.75 per cent for almost a year between raising them to that level in November 2010 and cutting them back to 4.5 per cent in November 2011.

The bank’s decision surprised no one, with all 32 financial institution economists surveyed by Bloomberg ahead of the meeting forecasting rates to remain steady at 2.5 per cent. Economists that are forecasting a further rate cut expect the move later in the year, as unemployment rises. However, the statement by Reserve Bank governor Glenn Stevens has cast further doubts on the likelihood of another rate cut, and certainly implies that the next move is likely to be many more months away, whether it is up or down.

“In the board’s judgement, monetary policy is appropriately configured to foster sustainable growth in demand and inflation outcomes consistent with the target,” Mr Stevens declared.

“On present indications, the most prudent course is likely to be a period of stability in interest rates.”

“That probably means they think they’re done unless the world falls apart,” RBC Capital Markets strategist Michael Turner told Reuters.

Many other analysts agree that the Reserve Bank now sees itself as being at the bottom of the interest rate cycle. The Commonwealth Bank’s chief economist Michael Blythe says the governor’s statement was more confident about economic growth overseas and domestically, and also less sanguine about inflation.

“If you’re more confident on growth and you’re more worried about inflation then you’re certainly not thinking rate cuts,” he said.

“What we’ve seen in the statement for the first time really is some forward guidance being provided by the RBA … that’s a pretty clear indication that easing bias that was there for most of last year is now gone.”

In response, the Australian dollar jumped from around 87.6 to as high as 88.9 US cents within a couple of hours of the decision being announced at 2:30pm (AEDT), as currency traders cut their bets on further rate reductions. However, JP Morgan’s chief economist Stephen Walters is retaining his long held view that interest rates will need to fall further as unemployment keeps rising towards 6.5 per cent.

“We still lean towards the RBA probably having to deliver further modest easing later this year, partly on the assumption that bank officials will receive no further assistance from a lower Australian dollar or fiscal policy in providing support for the economy,” he wrote in a note on the RBA decision.

“In fact, the [federal] budget in May seems increasingly likely to unleash more austerity that our calculation of the fiscal drag assumes.”


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