The Reserve Bank of Australia has bad news for borrowers – no more interest rate cuts for some time.
The RBA kept the cash rate unchanged at its first board meeting of 2014, highlighting an improved outlook for the local and overseas economies.
It also flagged the end of the rate cutting cycle that has seen the cash rate fall to 2.5 per cent, from 4.75 per cent in November 2010.
“On present indications, the most prudent course is likely to be a period of stability in interest rates,” RBA governor Glenn Stevens said in a statement accompanying the decision.
The bank’s statement signalled no movements in the cash rate for at least a year, RBC Capital Markets senior economist Su-Lin Ong said.
“We think the cash rate will stay at a record low of 2.5 per cent for an extended period, probably well into 2015,” she said.
AMP chief economist Shane Oliver expects the Reserve Bank to raise the cash rate in September or October in response to stronger economic growth.
“We see the RBA leaving interest rates on hold at 2.5 per cent for at least six months as growth remains low but signs continue to build that growth will pick up later in the year,” he said.
“However, it would have made more sense for the RBA to retain the easing bias even though it didn’t expect to cut again, because it helped maintain downwards pressure on the Australian dollar.”
In the latter half of 2013, Mr Stevens on several occasions said the Australian dollar was uncomfortably high.
In recent weeks the Australian dollar has stayed below 90 US cents, which seemed to please the RBA governor.
“The exchange rate has declined further, which, if sustained, will assist in achieving balanced growth in the economy,” Mr Stevens said.
The RBA governor also said there is a good chance that growth in the global economy should soon pick up.
“The United States economy continues its expansion and the euro area has begun a recovery from recession, albeit a fragile one,” Mr Stevens said.
Previous cuts by the RBA have helped boost the interest rate sensitive parts of the local economy, eliminating the immediate need for the RBA to cut the cash rate further, Ms Ong said.
“They’re continuing to see signs of policy traction both in consumer consumption and housing, so they’re pretty comfortable to sit where they are,” she said.
