Interest Rates on Hold – For Now

November 13th, 2015
The Reserve Bank of Australia (RBA) left interest rates on hold in their latest announcement, with the record low of 2 percent set to continue for another month. With the economy continuing to strengthen and the property market just starting to slow down, the RBA were unwilling to move rates below the position they have been at since May. The option for a future rate reduction has definitely been left on the table, however, especially if inflation continues to soften in the lead-up to Christmas.

According to RBA Governor Glenn Stevens in the official RBA statement, "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... 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.”

The decision to leave rates on hold would not have been an easy one, with the RBA weighing up recent improvements to employment and the economy against weak inflation levels and variable mortgage rate rises from the big banks. The latest Consumer Price Index (CPI) issued in September showed an inflation rate of just 1.5 percent, well below both RBA expectations and the long-term average. The inflation rate in Australia averaged 5.16 percent between 1951 and 2015, with a recent high of 3 percent recorded in July 2014.

Recent moves by the big banks to increase variable mortgage rates would have also influenced the RBA decision, with Westpac, ANZ, the Commonwealth Bank, and NAB all rising rates between 15 to 20 basis points last month. Borrowers can now expect to pay about $30 per month extra on a $300,000 loan, with a total of eight banks having now followed the initial Westpac move. If inflation slows even more in coming months and the market struggles with these higher rates, a reduction in the official cash rate is definitely on the cards.

According to JP Morgan senior economist Ben Jarman, however, recent moves by the commercial banks are unlikely to have a negative effect. "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... 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." Even if the official cash rate is dropped next month like some people expect, there is a high likelihood the full cut won't be passed on to borrowers.

The RBA seem comfortable with these independent decisions, with Stevens saying "while the recent changes to some lending rates for housing will reduce this support slightly, overall conditions are still quite accommodative." The retail sector are not nearly as positive, however, with the Australian Retailers Association (RTA) calling on the RBA to drop rates as a way of offset bank rate rises. According to Russell Zimmerman from the RTA, "Our concern is if you have an interest rate increase as we've had, it will take money out of the economy and we will see a downturn spend... By the time you take out a rate increase which will add on to the average mortgage around $65 to $70 a month, it's quite a sizeable amount of money out of the retail economy."

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