Interest Rates remain on hold

As expected, the Reserve Bank of Australia (RBA) has left the cash rate at 1.5%.

While there is a general consensus the RBA will eventually cut rates between now and September, with tonight’s likely stimulatory pre-election Federal Budget (ie low-middle income tax cuts) yet to be delivered, the RBA (a reluctant rate cutter) is probably keeping its powder dry. Another unresolved issue waiting in the wings is a potential trade deal between the US & China, which could easily have a positive flow-on effect for Australia. Wages growth, the health of the residential property market and the continued tight credit conditions will also play a role over the coming months.

AMP’s Dr Shane Oliver comments… “While the threat to growth and inflation from the housing downturn (via reduced construction activity and negative wealth effects) is such that the RBA should cut interest rates in order to get in before unemployment starts rising, the most likely scenario is that they will continue to hold,” he said. 

“The RBA probably needs to see more evidence that the slowdown seen in the second half last year is not just temporary, that consumer spending is under serious threat and that this will drive higher unemployment and lower for longer inflation. 

“It will probably also want to see what sort of fiscal stimulus comes out of the budget and the federal election outcome.”

He added: “So rate cuts are probably still several months off."

Rick Maggi