The RBA decided today to maintain the cash rate setting of 2.50%. The RBA has now been on hold since the last rate cut in August 2013 and remains comfortable with a period of stability in interest rates.

The decision was expected by markets given the RBA has continued its rhetoric regarding a period of stability in rates. Specifically mentioned in the RBA’s announcement was the slowing down in Chinese growth, in contrast to firmer conditions in the advanced economies. The sharper slow-down in China has had a significant impact on commodity prices with those commodities important to Australia continuing to decline. Emerging market economies are once again receiving capital inflows, volatility in both bond and equity markets is unusually low, and markets globally are attaching very low probabilities to any rise in global interest rates over the period ahead.

Locally, resource sector investment spending is set to decline significantly and, at this stage, signs of improvement in investment intentions in other sectors are only tentative, as firms wait for more evidence of improved conditions before committing to expansion plans. They noted that there has been a pick-up in consumer demand along with a strong expansion in housing construction which is now under way.

The RBA made specific mention that whilst there has been a recent improvement in indicators for the labour market, there is still plenty of slack with growth in wages continuing to decline. Inflation received more attention than in recent announcements with the RBA very comfortable with inflation remaining within the 2-3% target over the next 1-2 years, even with a lower Aussie dollar.

Looking ahead, continued accommodative monetary policy should provide support to demand, and help growth to strengthen over time. We believe the RBA will be on hold for an extended period of time, in line with their rhetoric, considering the economy is still growing below trend, Chinese growth is slowing, inflation is under control, slack remains in the labour market, and with tighter fiscal conditions ahead given the Government’s budget intentions

 

Follow: Subscribe to this post's comments