Reserve Bank keeps interest rate at 2 per cent, leaves door open for further cut

The Reserve Bank of Australia has left interest rates on hold at the historic low of 2 per cent, but opened the door for a rate cut.

The RBA left the official cash rate where it has been since May, saying in a statement prospects for an improvement in the economy had strengthened a little in recent months, so leaving interest rates on hold was appropriate.

But the board said a soft inflation outlook could leave room for a further rate cut if needed.

The dollar jumped on the announcement and at 5:00pm AEDT it was buying 72 US cents.

“At today’s meeting, the board judged that the prospects for an improvement in economic conditions had firmed a little over recent months and that leaving the cash rate unchanged was appropriate at this meeting,” Reserve Bank governor Glenn Stevens said.

“Members also observed that the outlook for inflation may afford scope for further easing of policy, should that be appropriate to lend support to demand.”

Last week, the September quarter Consumer Price Index (CPI) showed annual headline inflation was running at just 1.5 per cent, which was weaker than expected and below the RBA’s forecasts.

Despite this soft inflation outlook, most economists bet the central bank was unlikely to hand down a Melbourne Cup-day rate cut.

It was a close call, according to economists, as the RBA had to balance improvements in the economy and steady unemployment against weak inflation and recent variable mortgage rate rises from the big banks.

Westpac, ANZ, the Commonwealth Bank and NAB all announced rate rises of between 15 to 20 basis points last month.

In the RBA’s statement, Mr Stevens said, “while the recent changes to some lending rates for housing will reduce this support slightly, overall conditions are still quite accommodative”.

JP Morgan senior economist Ben Jarman said the statement suggested the bank was comfortable with the independent moves by the big banks.

“Some changes in lending rates at the margin will obviously act to slow the housing market, but they still put this in the big picture and say that overall conditions are pretty accommodative,” Mr Jarman said.

“So after four years of cash rate cuts, it’s hard to look at what the banks have done recently and say that it really tightens conditions aggressively.”

Treasurer Scott Morrison said the Government wanted to encourage jobs and growth and that interest rates were already low.

“Rates are stable and they’re low, which I think provides a good opportunity for businesses, particularly, to invest,” he told Macquarie Radio.

“We’ve seen those conditions for businesses in various surveys continuing to improve and that’s encouraging.”

The Australian Retailers Association (ARA) was quick to react, saying it was “disappointed” with the RBA’s decision, as it had come at the cost of much-needed Christmas spending for retailers.

“The ARA has been calling for a reduction in interest rates for some time, and we are disappointed that this has fallen on deaf ears,” executive director Russell Zimmerman said in a statement.

“An interest rate cut would have provided consumers with more discretionary dollars in their pockets and higher confidence, which generally leads to a greater willingness to spend.”

Economists now expect the central bank to revise its inflation forecasts in its Statement on Monetary Policy later this week.

Source: ABC News