RBA keeps rates on hold for eighth straight month

The RBA has left interest rates on hold for the Eighth straight meeting.

The cash rate remains at 4.75%. It was last raised by 25 basis points in November last year.

Before the decision, economists were split over whether the central bank would raise interest rates following higher-than-forecast CPI figures for the June quarter.

Annual inflation currently stands at 3.6%, outside of the RBA’s target band of between 2% and 3%.

Concerns over continued economic woes in Europe and the US were factors identified as inhibiting a rate rise.

The Australian dollar hardly changed in response to the news, trading at $1.097 off a day high of $1.10.

A statement by RBA governor Glenn Stevens following today’s decision revealed that global concerns outweighed domestic inflation worries.

“At today's meeting, the board considered whether the recent information warranted further policy tightening. 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. In future meetings, the board will continue to assess carefully the evolving outlook for growth and inflation,” Stevens says.

Stevens says downside risks to the global economy have increased, however, as concerns have grown over the outlook for the public finances of both Europe and the United States.

On the issue of inflation, Stevens said year-ended CPI inflation has been high, affected by the extreme weather events earlier in the year.

“As these effects reverse over the next couple of quarters, CPI inflation should decline. But 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. While they have, to date, remained consistent with the 2 to 3% target on a year-ended basis, the board remains concerned about the medium-term outlook for inflation,” he says.

Commenting on the RBA’s decision, RP Data national research director Tim Lawless says Australians have become very interest rate-sensitive, a fact that can be seen in the low number of transactions across the housing market and weak growth in retail spending.

“At a time when inflation has risen outside of the RBA’s comfort zone we also have a situation where consumers simply aren’t spending and are lacking confidence. The stability in interest rates over the past nine months would have been welcomed by many mortgage holders, however speculation about future rate lifts is likely to continue to dampen market conditions anyway,” he says.

The RBA’s decision to keep rates on hold follows ABS data that reveals the magnitude of house price falls as well as the continued deterioration of the home building sector.

House prices have fallen by 1.9% across capital city markets for the year to June 2011, with the biggest falls in Perth and Brisbane, while home building approvals fell to a two-year low in June 2011.

The seasonally adjusted estimate for total dwellings approved fell 3.5% following a fall of 6.3% in the previous month, according to ABS figures.

“Evidence continues to mount of an accelerated deterioration in new home building conditions,” says HIA chief economist Harley Dale.

“That situation highlights the appropriateness of continued steady interest rates, the need for stimulus to arrest the new housing decline, and the importance of reform at the October Tax Forum to remove the excessive taxation levied on new residential construction,” Dale says.

Westpac said building approvals were significantly weaker than expected in June, with surprising weakness noted in Queensland.

“They are now 19.6% lower since December - a surprise given that initial falls were mainly due to disruptions from weather events in January to February that were expected to see a significant bounce mid-year as activity returned to normal in affected areas and rebuilding activity came through,” says Julie Doel from Westpac Economics.

“Instead, approvals recorded a partial revival in March (+8.1% for the month) but have moved steadily lower since. Some of this may be because of approval waivers for post-flood rebuilds in parts of Queensland.”

Larry Schlesinger

Larry Schlesinger

Larry Schlesinger was a property writer at Property Observer


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