RBA set to leave cash rate unchanged
July 31, 2009
The Reserve Bank of Australia (RBA) is expected to leave interest rates on hold next week in a further sign it has reached the end of its rate cutting cycle, economists say.
All of the 19 economists surveyed by AAP said the cash rate will remain at a 49 year low of three per cent after the central bank's board meeting on August 4.
Some 11 economists believe the cash rate will stay at that level until the end of the 2010 March quarter, as the economy is tested by a rising jobless rate and potential housing bubble.
However, four of the economists surveyed believe recent comments by RBA governor Glenn Stevens mean there could be a rate hike - the first since March 2008 - before the end of calendar 2009.
"The RBA appears to have no intention of reducing the cash rate any further," said Matt Robinson, an economist with Moody's Economy.com.
"I think a housing market bubble is starting to form, and given the sentiment that governor Stevens expressed in his speech to the Australian Business Economists, that is something that the RBA is watching and that would be a reason for them to maybe hike interest rates earlier."
In a speech at a charity function on Tuesday, governor Stevens said it will be a "very real challenge" in the near term to make sure the ready availability and low cost of housing finance translated into an increased supply of dwellings.
He also raised doubts about whether the RBA would be deterred from raising rates if unemployment continued to rise.
"I've never seen written down, or I've never heard in discussion in the institution some rule of thumb that says we wait till unemployment's peaked before we lift the cash rate," he said in response to a question.
Since the RBA started publicly announcing its interest rate moves in January 1990, its interest rate increases have almost invariably been made when unemployment was trending lower.
Between September last year and April the central bank cut the cash rate by 425 basis points to it's current 49-year-low.
The RBA has kept the cash rate at three per cent for three consecutive months.
Michael Turner, an economist with financial markets research group 4Cast, said the prospect of rising unemployment would mean the cental bank could keep rates steady until well into 2010.
"We're still of the opinion the worse is yet to come and things look better now than they did a couple of months ago, which is why we're now calling it on hold (in August) rather than going lower," he said.
"But we still think there's enough of a story in the lack of utilisation in the economy at the moment that price pressure might be moderate enough at three per cent.
"We're currently chewing on a rate rise in 2010 at the moment. It's possible, but not until late 2010."
The nation's unemployment rate stands at 5.8 per cent, according to the latest figures from the Australian Bureau of Statistics.
Treasury forecasts included in the federal budget project the jobless rate to rise to 8.5 per cent by late 2010.
"Stevens' speech has given me a lot more confidence," said ICAP economist Adam Carr, who predicted the central bank would raise rates by 25 basis points in the December quarter and again in the first quarter of 2010.
"I think that was a critical statement.
"If you look at the split in the market or the way the debate was being conducted it was very much the idea that the RBA isn't going to hike because they never have while the jobless rate has been rising.
"For him to deliberately dismiss that and mention it I think is critical, because it was the consensus view and he's said 'well, no, that's wrong. If we need to hike we will'."
The RBA is due to announce its decision on interest rates at 1430 AEST on Tuesday.
