RBA keeps interest rates on hold at 2.25%

Tuesday, July 3, 2018

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The Reserve Bank of Australia on Tuesday held the cash rate at 2.25 per cent, but hinted strongly at a follow-up to its February cut over the next few months.

The February reduction, of 25 basis points, left the cash rate at its lowest level since the 1950s. The market had rated the chance of a second cut in as many months at about 60 per cent.

The Australia dollar reacted sharply to Tuesday’s decision, surging about US0.40¢ to around US78.20¢ before slipping again because of the bank’s obvious easing bias.

In the statement accompanying the decision, RBA governor Glenn Stevens said “further easing of policy may be appropriate over the period ahead, in order to foster sustainable growth in demand and inflation consistent with the target.

“The board will further assess the case for such action at forthcoming meetings,” he said.

Much of the rest of the statement was similar to February’s, with the sluggish pace of Australia’s economic rebalancing, the overvalued currency, and spare capacity in the jobs market continuing to weigh heavy on the RBA’s deliberations.

Offsetting this are ongoing concerns about Sydney’s overheated property market.

“Credit is recording moderate growth overall, with stronger growth in lending to investors in housing assets,” Mr Stevens said.

“Dwelling prices continue to rise strongly in Sydney, though trends have been more varied in a number of other cities over recent months,” he said.

“The bank is working with other regulators to assess and contain risks that may arise from the housing market.”

Australia and New Zealand Banking group chief economist Warren Hogan said the RBA would probably cut the cash rate again in April.

“A sustained non-mining recovery remains elusive, dependent on new investment outside of the property and construction sectors,” he said.

“Over the medium-term, the currency is critical and there is little evidence that it is having the desired positive impact on investment decisions and employment as yet.”

JP Morgan economist Ben Jarman said concerns about the Sydney property market partly explained the RBA’s decision to hold rates.

“The housing market in Sydney, in particular, did see a strong initial response to the February easing, which is probably making officials a little jittery, and keen to sit back and observe how the spillovers accumulate,” he said.