Video settings

Please Log in to update your video settings

Video will begin in 5 seconds.

Video settings

Please Log in to update your video settings

Interest rates on hold

The RBA has left rates on hold for eight consecutive months, the Age's economics editor Peter Martin explains why.

PT1M49S http://www.canberratimes.com.au/action/externalEmbeddedPlayer?id=d-35tkk 620 349

The Reserve Bank has kept the cash rate at a record low of 2.5 per cent for its seventh straight board meeting.

It was widely expected that the cash rate would stay on hold, with all of the 33 economists surveyed by Bloomberg predicting the Reserve Bank would stay on the sidelines for another month.

The news pushed the Australian dollar up briefly up to US93.04¢, but within minutes of the announcement the gains were given up and the local currency was trading at US92.75¢. The Australian dollar has risen by more than 3.5 per cent since the Reserve Bank's last meeting in early March.

The Reserve Bank of Australia is expected to keep the cash rate on hold.

The Reserve Bank of Australia was widely expected to keep the cash rate on hold. Photo: Bloomberg

The strength in the local currency has threatened to undo the nascent growth in non-mining sectors of the economy as the resources investment boom fades.

RBA governor Glenn Stevens noted the recent rise in the dollar in the statement released following the meeting on Tuesday, saying "the decline in the exchange rate from its highs a year ago will assist in achieving balanced growth in the economy, but less so than previously as a result of the rise over the past few months".

"The exchange rate remains high by historical standards," Mr Stevens said, avoiding the "uncomfortably high" comments he had made about the dollar late last year.

At the same time, the local currency's fall from parity since mid-April last year had been partly blamed for the surprise jump in inflation in the last three months of 2013.

The central bank, which shifted to a neutral monetary policy stance in February, continued to indicate that it would pursue a "period of stability" in interest rates.

"In the Board's judgement, monetary policy is appropriately configured to foster sustainable growth in demand and inflation outcomes consistent with the target," Mr Stevens said.

"On present indications, the most prudent course is likely to be a period of stability in interest rates."

The decision showed the RBA was "comfortable with how the economy is responding to low borrowing costs", Moody's Analytics associate economist Katrina Ell said.

But she echoed the RBA's sentiment that the dollar needed to fall further to support the economy as mining investment declines. 

The bank has slashed interest rates by 225 points since November 2011, with the low interest-rate environment encouraging growth in the housing market.

But while the residential property market has boomed, business investment has remained cautious and the demand for labour has been weak.

The jobless rate is at a decade high of 6 per cent, and has been tipped by the RBA and the Treasury to edge up further over the next few months.

A private survey by TD Securities and the Melbourne Institute released on Monday showed that the annual rate of inflation remained near the upper level of the Reserve Bank's 2 to 3 per cent target band.

Economists said while the Reserve Bank has been reluctant to ease the cash rate further amid concern that such a move could overheat the housing market, raising interest rates could also pushed the exchange rate higher.

The gains in the housing market, which saw home prices surged by 2.3 per cent in March according to RP Data and Rismark figures released on Tuesday, have seen the Reserve Bank warn borrowers and banks about property speculation in the past few weeks. The RBA also cautioned that housing prices could fall as well as rise.

Even so, Tuesday's statement did not continue the central bank's recent rhetoric on home prices, economists noted.

"The rapid pace of house price growth didn't get much of a workout," Commonwealth Bank's chief economist Michael Blythe said in a note.

"This is a little surprising given recent concerns and indications that the RBA is now trying to 'jawbone' the housing market rather than the currency."