Industry laments RBA hold on interest rates, economists warn change not coming soon

Business has once again been left disappointed by the Reserve Bank’s failure to cut interest rates at its board meeting yesterday, but experts are saying the next rate cut may be one of the last for a while.

Economists say an improving economy has eased the pressure on the RBA to cut rates.

“It’s getting to the point now where it’s becoming harder to call,” says AMP senior economist Shane Oliver.

“We’re at the low end of the cycle and are starting to see green shoots emerge in business confidence, retail sales, home prices and even home sales.”

In his statement yesterday, RBA governor Glenn Stevens noted the board believes growth is close to trend – for now – and with inflation data not yet available, it seems prudent to stay on top of the current interest rates.

As CommSec chief economist Craig James points out, there have already been improvements in the economy. The Australian dollar has eased off, retail spending increased in January, job ads are beginning to recovery and the global financial market – save the sequester controversy in the United States – is getting better.

James says the RBA will probably cut rates again, but it won’t do so immediately.

“CommSec expects the Reserve Bank to stay on the interest rate sidelines for the next few months. While an easing bias is likely to be maintained – a preference to cut rates – we don’t expect the Reserve Bank to act on that bias.”

“The longer the period of interest rate stability, the greater the likelihood that the Reserve Bank will look to lift rates from super-low levels in the future. A ‘normal’ or neutral level for the cash rate would be around 4%.”

Of course, not everyone is happy. Both the Housing Industry Association and Retailers Association have made it clear their preference is for rates to continue to fall.

ARA executive director Russell Zimmerman said while retail sales indicate things are improving, the industry still wants banks to pass on rate cuts despite the lack of movement from the RBA.

“The ARA still firmly believes the right cash rate sits at around 2.5%. Of course, we still need to see the banks bring interest rates down to levels which match other economically comparable countries and alleviate pressure on their consumer and business borrowers.”

Harley Dale, chief economist at the Housing Industry Association, says there is an increasing risk the RBA won’t budge for a while – but says it’s clear the board recognises the trouble in the housing industry.

“The irony of all this is that if it turns out the Reserve Bank doesn’t do anything for a while, but then lowers rates, by far the most likely reason is because they were continuing to see an underperforming residential construction industry.”

Yet a wait is exactly what some economists, such as Shane Oliver, expect.

“My feeling is they probably will and should ease again, and if it’s going to happy it’ll occur in the June quarter, perhaps May or June.”

“But it can go either way. If those green shoots don’t develop further, we can definitely have more rate cuts.”

 

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