Interest rates on hold again

The RBA faces a trade-off between its desire to boost growth, to keep inflation in check, and the risks that lower interest rates could pose to financial stability, HSBC chief economist Paul Bloxham said.

“As long as the export prices continue to be weak for Australia, they have a bias to not want the currency to get any stronger”, Kit Juckes, London-based global strategist at Societe Generale SA, said before the decision was announced.

It is the eighth meeting, and ninth month, in a row that Australia’s official interest rate has remained unchanged at a record low 2 per cent. The market is looking for the RBA’s view towards the Australian dollar and its outlook for interest rates. That said, AUD could do well against NZD especially if the NZ labour market data overnight disappoints, fuelling market bets on RBNZ rate cut as soon as March. This partly reflects slower growth in demand but also very substantial increases in supply over recent years. Surveys of business conditions moved to above average levels, employment growth picked up and the unemployment rate declined in the second half of the year, even though measured GDP growth was below average.

The cooling housing market could push interest rates lower again this year, although the effect on house prices may be negligible compared to 2015, economists say.

But first, the Australian economy has struggled for growth recently, largely due to the slowdown in China’s expansion together with crashing commodity prices. The Board therefore decided that the current setting of monetary policy remained appropriate.

‘However, inflation is low and forecast to stay subdued, leaving the RBA with scope to cut further’.