RBA takes pause, holds cash rate at 3.75%

At its monthly Board meeting today, the Reserve Bank of Australia shocked most analysts with a decision to leave the cash rate unchanged at 3.75 per cent.

While the move came as a surprise to many, there was enough indifferent data in the past fortnight to provide reasons for a pause and the RBA has never been keen to hike for too many consectuive months. Indeed, their latest streak of three months was the longest in history.

“Global financial markets are functioning much better than they were a year ago,” RBA Governor Glenn Stevens noted, upon releasing the news. “Credit conditions nonetheless remain difficult in the major countries as banks continue to face loan losses associated with the period of economic weakness. Concerns regarding some sovereigns have increased.

“In Australia, economic conditions have been stronger than expected, after a mild downturn a year ago. The effects of the fiscal stimulus on consumer demand have now faded, but household finances are being supported by strong labour market outcomes and a recovery in net worth.”

Mr Stevens said that the unemployment rate had probably peaked while inflation was likely to “be consistent with the target in 2010′.

The Board saw significant strength in the housing sector but they drew caution from soft business lending data. The central bank warned, however, that the cash rate would still trend up in the coming months.

“With the risk of serious economic contraction in Australia having passed, the Board had moved at recent meetings to lessen the degree of monetary stimulus that was put in place when the outlook appeared to be much weaker,” Mr Stevens noted. “Lenders have generally raised rates a little more than the cash rate over recent months and most loan rates have risen by close to a percentage point. Since information about the early impact of those changes is still limited, the Board judged it appropriate to hold a steady setting of monetary policy for the time being.

“Interest rates to most borrowers nonetheless remain lower than average. If economic conditions evolve broadly as expected, the Board considers it likely that monetary policy will, over time, need to be adjusted further in order to ensure that inflation remains consistent with the target over the medium term.”

Posted Tuesday 2nd of February 2010, 3:49 PM