Reserve holds fire as earlier cuts kick in
After leaving the cash rate unchanged at its record low of 3 per cent on Tuesday, governor Glenn Stevens said interest rate settings were "appropriate" for an economy in which consumer spending was "moderate" and non-mining investment was "subdued".
While low inflation gave the Reserve "scope to ease policy further should that be necessary" there was not yet a big enough threat to economic growth to justify a further move.
However, markets are unconvinced the RBA has any urgent plans to cut rates, and on Tuesday night investors were betting there was only a one-in-three chance of a cut next month.
The Reserve's decision came after economic data suggested there were early signs the 50 basis points of cuts in October and December were filtering through to the economy.
Retail sales rose 0.9 per cent in January, surpassing economists' expectations, after three consecutive months of falls.
At the same time, the current account deficit narrowed and there was an increase in government spending for the fourth quarter of 2012.
After positive signs for business investment, the Reserve also believes Australia's mining investment boom will last longer than it had thought. However, it thinks the outlook is highly uncertain and it is on standby to cut interest rates again as soon as is needed.
Last week's ABS capital expenditure survey played an important role at Tuesday's Melbourne board meeting, persuading members the mining investment boom was not as weak as had been thought and suggesting non-mining investment might pick up in the second half of the year.
But with so few mining companies involved in the big decisions and with much that could go wrong, the Reserve is not putting much store in investment forecasts.
In a statement after the meeting Mr Stevens said the four rate cuts last year were "starting to have some of the desired effects". Consumer spending was growing moderately, and home building and house prices were climbing.
Holding the economy back were constrained government spending and an exchange rate "higher than might have been expected".
ANZ's interest rate strategist, Tony Morriss, said investors were placing growing bets the Reserve would keep rates unchanged after the recent run of positive economic news.
"It just seems they are very comfortable with the current policy settings," Mr Morriss said.
Market analysts also say the big banks may soon be forced to cut rates independently of the Reserve in response to lower funding costs, which could reduce the need for official moves.
Macquarie's banking analyst, Mike Wiblin, said it was clear wholesale, and increasingly deposit, funding costs were coming down. He said this is likely to put pressure on the banks to cut their mortgage rates, especially in an election year.
In a note to investors, Mr Wiblin said mortgage rate decisions had been a key driver of profit growth for the Commonwealth and Bendigo Bank, but this was not sustainable. "Now that their funding costs are going down, they may need to pass on those lower funding costs to mortgage customers they have priced up over the last five years," Mr Wiblin said.
Frequently Asked Questions about this Article…
The Reserve Bank left the cash rate unchanged at its record low of 3%. For everyday investors, that means official borrowing costs stayed the same — good news for borrowers and a sign the RBA is comfortable with current policy while remaining ready to cut again if the economy weakens.
The RBA said low inflation gives it scope to ease policy further, but recent data suggested the earlier rate cuts were already filtering through and there wasn't yet a big enough threat to growth to justify another cut. The bank described consumer spending as 'moderate' and non-mining investment as 'subdued', so it held rates for now.
According to the RBA, the four rate cuts last year — including 50 basis points in October and December — are starting to have desired effects: consumer spending is growing moderately, home building and house prices are rising, and other indicators such as retail sales have shown improvement.
Recent signs include retail sales rising 0.9% in January (beating expectations), a narrowed current account deficit, increased government spending in Q4 2012, and ABS capital expenditure survey results that suggested mining investment was stronger than previously thought and non-mining investment might pick up later in the year.
The RBA now believes Australia's mining investment boom will last longer than previously thought, but it also flagged the outlook is highly uncertain because relatively few mining companies make big decisions. For investors, that means mining-sector forecasts are more uncertain and deserve careful scrutiny.
Markets were unconvinced the RBA had urgent plans to cut and were pricing only about a one-in-three chance of a cut the following month. The RBA said it remains on standby to ease policy further if needed, so future moves will depend on incoming economic data.
Yes. Market analysts in the article said banks may be forced to cut mortgage rates independently because wholesale and deposit funding costs are coming down. That pressure could lead major lenders to lower mortgage rates even without an RBA decision.
Macquarie's analyst noted mortgage rate decisions have been a key driver of profit growth for lenders like Commonwealth and Bendigo Bank, but that may not be sustainable. As funding costs fall, banks may need to pass savings on to mortgage customers, which could reduce the margin boost investors have recently seen. Investors should watch funding-cost trends and mortgage-rate moves closely.
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