Tuesday, 6 March 2012

The Reserve Bank left interest rate ON HOLD





The Reserve Bank has left its key interest rate unchanged for a second consecutive month as it weighs improving global conditions against a patchy economy at home.

As widely expected, the central bank left its cash rate unchanged at 4.25 per cent, a result tipped by all 19 economists in a Bloomberg survey.
"They say policy is appropriate for now," said JP Morgan economist Stephen Walter, adding that conditions would need to weaken significantly for a further cut.

Expectations that the RBA would soon add to the back-to-back monthly rate cuts at the end of 2011 have largely dissipated after the central bank surprised pundits and markets alike at last month’s rates meeting by declaring that its monetary policy was ‘‘appropriate’’ for now.
Today's commentary by RBA governor Glenn Stevens was little changed from a month ago, with the bank keeping its interest rate powder dry should conditions deteriorate.
"With growth expected to be close to trend and inflation close to target, the Board judged that the setting of monetary policy remained appropriate for the moment," said Mr Stevens. "Should demand conditions weaken materially, the inflation outlook would provide scope for easier monetary policy."
The dollar lost ground after the RBA verdict on rates, easing to $US1.063 from $US1.065 just prior to the announcement.
RBA on hold?
Even though the dollar slid - usually a sign investors have raised their expectations of another RBA rate cut - several economists interpreted today's RBA comments as implying the bank won't cut interest rates again soon.
"There was certainly nothing in the statement that suggested an imminent rate cut," said Michael Blythe, chief economist at Commonwealth Bank.
"The risks are still there, but inflation means they can still cut rates if necessary. There is no suggestion they see any reason to do anything pre-emptive on the back of those risks," he said.
"We see it on hold for the rest of the year," said Matthew Johnson, senior economist at UBS.
"The RBA views the economy as pretty healthy on the whol," Mr Johnson said. "If there is a rise in unemployment to perhaps 5.4 per cent, that could change things for the RBA."
ANZ in focus
The attention of many borrowers will now switch to this Friday when the ANZ bank will make again announce its interest rates independently of the RBA.
Last month, the ANZ defied politicians and the public alike by opting to lift its variable mortgage lending rate by 6 basis points, or 0.06 percentage points, citing higher funding costs that it had to recoup. The move was quickly followed by most rivals, with 42 lenders raising their variable lending rates by an average of 10 basis points, according to data from rate tracking agency Canstar.
The strength of the Australian economy will be revealed tomorrow with the release of the national accounts for the December quarter. Figures out this week indicate that growth may come in a bit higher than had been expected as rising exports and increased government spending stoke demand.
Still, many companies outside the mining sector have complained of weak demand and rising competition from abroad because of the strong dollar. Westpac added to a long list of firms announcing job cuts, revealing today the loss of another 126 positions.

The RBA, though, has in recent weeks taken a more upbeat assessment of the prospects for the US economy and views a collapse of the euro zone economies as less likely. However, cheer about a reviving global economy is muted somewhat by indications that the economy of China - Australia’s largest export market - will expand by a sub-8 per cent rate in 2012.

There may be some further interest rate relief ahead.
Prior to today’s RBA decision, financial markets were betting that the central bank will cut its cash rate by 25 basis points to 4 per cent by June.

czappone@fairfax.com.au
 with Reuters