Business disappointed by Reserve Bank decision to leave rates unchanged at 3%

The Reserve Bank decided to keep the official interest rate unchanged at its first meeting for 2013 this afternoon, in line with economists’ expectations, but already business has expressed its disappointment.

In a statement, Reserve Bank governor Glenn Stevens wrote while some sectors of the Australian economy are recording weaker activity, global risks to the financial system have subsided – meaning now is a good time to watch and wait.

“Sentiment in financial markets has continued to improve, with risk spreads narrowing and funding conditions for financial institutions becoming more favourable,” Steven said.

He also noted most indicators available showed growth was close to trend in 2012, although noted the peak in resources investment is approaching. He also said the near-term outlook for non-residential building investment, and investment outside the resources sector, remains subdued.

“The inflation outlook, as assessed at present, would afford scope to ease policy further, should that be necessary to support demand.”

“At today’s meeting, taking into account the flow of recent information and noting that there had been a substantial easing of policy as a result of previous decisions, the Board judged that it was prudent to leave the cash rate unchanged. “

But business is disappointed with the decision. Alex Malley, chief executive of CPA Australia, said in a statement the organisation is “disappointed” about the decision.

“With its ‘no change’ decision today, the RBA is sitting on the sidelines and joins a cautious government which is now in election mode,” he said.

“What we appear to have is a vague expectation that the economy will move forward with no hands on the tiller. This uncertainty is hardly a way to stimulate consumption or encourage business investment.”

1300HomeLoan managing director John Kolenda even said the Reserve Bank “has shown a complete lack of common sense”.

Property research group RP Data also said from now, the big wild card is the labour market, suggesting the question facing the RBA is “how high will unemployment go, and at what level will the RBA react with a further cat to the cash rate”.

CommSec economist Craig James also said the RBA is now clearly in “wait and see” mode, noting the previous cuts are beginning to make an impact.

“Interestingly the statement following the “no change” decision made it very clear that prior rate cuts are starting to garner traction and foster activity.

Board members discussed the shift in psychology of households. House prices were rising, retail activity was picking up and more importantly savers were shifting portfolios towards riskier asset classes. Loose monetary policy will continue to provide stimulus over coming months.

Before the decision this afternoon, Russel Zimmerman, executive director of the Australian Retailers’ Association, said the cash rate needs to be cut to 2.5%.

“Home mortgage and business borrowers are bearing the load of overblown pricing, with those economic implications that naturally come with the fiscal irresponsibility of failing to set interest rates relative to borrowing costs,” he said.

“To address a compromised economic situation, the RBA needs to cut official rates to 2.5% to get variable mortgage rates to a level of 6%”

The decision follows a Bloomberg poll in which 20 out of 24 economists said they expected the RBA to keep hold on rates.


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