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No Cup day cut as interest rates hold at 3.25%

Tuesday, 6 November 2012 | By Michelle Hammond

The Reserve Bank has confounded expectations by leaving the cash rate unchanged at 3.25%, despite widespread predictions of a 25 basis point cut, and an appeal from Westpac chief Gail Kelly to help lift flagging consumer sentiment.

 

Economists were widely tipping a Melbourne Cup rate cut, with some speculating the RBA is attempting to prepare the economy for the end of the mining boom.

 

Similarly, Westpac CEO Kelly urged the RBA to cut rates to help revive consumer confidence and the Australian economy, which is undergoing major “structural” change.

 

“We are in an environment where lower interest rates are the most likely outcome,” Kelly said before the RBA’s announcement.

 

“It would be beneficial for consumer confidence and sentiment if we continue to see rates come down.”

 

But at today’s board meeting, RBA governor Glenn Stevens said the current cash rate is “appropriate for the time being”, partly due to improvements in the global economy.

 

“The United States is recording moderate growth, while recent data from China suggest growth there has stabilised,” Stevens said.

 

With regard to Australia, Stevens admitted key commodity prices remain significantly lower than earlier in the year, although some prices have recovered some ground.

 

The terms of trade, meanwhile, have declined by about 13% since last year’s peak, but are likely to remain historically high, Stevens said.

 

“In Australia, most indicators available for this meeting suggest that growth has been running close to trend over the past year, led by very large increases in capital spending in the resources sector,” he said.

 

“Looking ahead, the peak in resource investment is likely to occur next year, at a lower level than expected six months ago.”

 

“As this peak approaches, the board will be monitoring the strength of other components of demand.”

 

Stevens said while some of the consumption strength in the first half of the year was temporary, there have been some signs of ongoing growth.

 

“Recent outcomes on inflation were slightly higher than expected, though they still show inflation consistent with the medium-term target, with underlying measures around 2.5% over the year to September, and headline CPI inflation a little lower than that,” Stevens said.

 

“The introduction of the carbon price affected consumer prices in the September quarter, and there could be some further small effects over the next couple of quarters.”

 

Stevens said over the past year, monetary policy has become “more accommodative”.

 

“Interest rates for borrowers have declined to be clearly below their medium-term averages and savers are facing increased incentives to look for assets with higher returns,” he said.

 

“While the impact of these changes takes some time to work through the economy, there are signs of easier conditions starting to have some of the expected effects.”

 

“Business demand for external funding has increased this year, the housing market has strengthened and share prices have risen in line with markets overseas.”

 

Stevens said the board will continue to monitor these effects but, on the back of higher than expected prices data and positive news for the global economy, the stance of monetary policy is appropriate for now.

 

Loan Market spokesperson Paul Smith said he is pleased the RBA didn’t use the Melbourne Cup as an impetus for rate movements.

 

“The RBA has already lowered the cash rate a full percentage point this year and so the current circumstances are entirely different to what we faced in 2009,” Smith said in a statement.

 

“Official rates were reduced in October and the central bank is still waiting to see how that rate cut and those made earlier in the year play out.”