Interest rate put on hold for fourth month in a row

Wednesday the 5th of August, 2009 3 Comments »

Posted by Iden Money .

Interest rates were left on hold for the fourth month in a row and signalled the end to its recent rate cutting cycle, economists said after the RBA decision to leave the cash rate at 3% on Tuesday.
RBA governor Glenn Stevens indicated monetary policy was now on a neutral footing.  Here are some of his comments:

“The board’s judgment is that the present accommodative setting of monetary policy is appropriate given the economy’s circumstances,” Mr Stevens said. “The board will continue to monitor how economic and financial conditions unfold and how they impinge on prospects for sustainable growth in economic activity and achieving the inflation target.”

“Economic conditions in Australia have been stronger than expected a few months ago, with both consumer spending and exports showing resilience.

“Measures of confidence have recovered a good deal of ground,” he added.

“This suggests that the risk of a severe contraction in the Australian economy has abated.”

Economists made the following comments:

Nomura Australia chief economist Stephen Roberts:

“The absence of any commentary referring to the potential for rates to be cut further meant the RBA had ended its easing cycle.  They have brought back a policy bias, from an easing bias back to neutral. They’ve taken out all wording referring to a capacity to lower rates further. But it could be quite a lengthy period on hold because inflation is coming down and the outlook on the economy is still fairly mixed.”

Colonial First State head of investments markets research Stephen Halmarick :

“The chance of more rate cuts has diminished. It seems they have gone back to a neutral bias . They say current settings are appropriate given the circumstances and that is consistent with the message the governor has been sending out in the past few weeks. Financial markets will now being looking ahead to the next set of forecasts for growth and inflation in the RBA’s quarterly statement on monetary policy to be released this Friday.   That will probably give us an idea on timing on when they might adjust policy outwards.”

The announcement followed the Prime Minister’s remarks that variable interest rates could rise by up to 1% in the next year. At the same time the current round of raising fixed rates witnesses a definite steeper yield curve having arrived. Indications are that investors think higher variable rates are a distinct possibly. Those who have not locked in to fixed rates yet may still have time to do so, if they think the Prime Minister’s call is correct.  At the moment this is a hard decision as the gap between the average variable rate of the major banks and their average 3 year rate is around 1%.