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Reserve Bank holds fire - for now

The Reserve Bank has kept interest rates on hold at its first board meeting of the year, after reducing the cash rate to a historic low of 3 per cent in December.

A majority of economists had tipped the RBA to stay its hand, with financial markets pricing in just a 16 per cent chance of a rate cut today.

The dollar slipped nearly half a cent on the decision to the day's low of $US1.0398 as the accompanying statement by RBA governor Glenn Stevens was considered fairly dovish, indicating the next move by the bank could be another cut.

''[T]he board judged that it was prudent to leave the cash rate unchanged,'' Mr Stevens said in the statement.


But he added that, with annual inflation currently within its target band of 2 to 3 per cent, the RBA had room to cut the cash rate further if needed.

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

''The board will continue to assess the outlook and adjust policy as needed to foster sustainable growth in demand and inflation outcomes consistent with the target over time.''

Scope for more easing

Citi senior economist Joshua Williamson said the Reserve Bank’s statement was more upbeat than its December statement, and had taken a ‘‘glass-half-full’’ approach to the Australian economy.

‘‘What this is suggesting is that the Reserve Bank is quite happy to wait and give the previous interest rate cuts some more time to actually gel with households and business,’’ Mr Williamson said.

It still looks like we've got some further easing to go. We've got them next going in May with a 25 basis point cut.

Ben Jarman, JPMorgan

‘‘They certainly think they’ve got the option of allowing them more time before they make another response. But of course, as  each particular board meeting occurs throughout the year, I think the window for further rate cuts is actually falling. ... But I think the comment they’ve made that there’s already been a significant easing of monetary policy suggest that they are at the tail-end of that.’’

RBC Capital Markets senior economist Su-Lin Ong said the RBA's statement was fairly balanced.

"There's still some caution in there but there's definitely a discussion that the global outlook is getting better, and that's consistent with what other central banks are saying," she said.

"Offsetting that to a degree, is some caution on the domestic economy side, that growth will be a little below trend, inflation is well behaved, giving scope to ease policy."

JPMorgan economist Ben Jarman noted the themes in the statement hadn't changed enough to call an and to the easing cycle.

"It still looks like we've got some further easing to go. We've got them next going in May with a 25 basis point cut," he said, adding: "We think it's going to take a little longer for the softness in the domestic data to give them enough evidence to go again."

Mr Stevens said the full impact of the four interest rate cuts in 2012 would take more time to become apparent.

''There are early indications of a pick-up in dwelling construction; and savers are starting to shift portfolios towards assets offering higher expected returns,'' he said. ''On the other hand, the exchange rate remains higher than might have been expected, given the observed decline in export prices, and the demand for credit is low, as some households and firms continue to seek lower debt levels.''

Strong dollar and productivity

The Reserve Bank restricted its commentary on the strong Australian dollar, only stating that the ‘‘exchange rate remains higher than might have been expected’’.

Mr Williamson said the limited comments reflected a realisation by the Reserve Bank that ‘‘they can do very little to influence the exchange rate given the global forces that are driving investment flows at the moment’’.

He added that the lack of a direct mention of the iron ore price, which has risen sharply in recent months, meant the board was not expecting the price to remain elevated in the long-term.

The Reserve Bank made another assumption - that there would be a lift in productivity. In its statement, the RBA said it expected the softening labour market and rising unemployment to contain labour cost pressures, with businesses chasing efficiency as demand remains moderate.

‘‘The Reserve Bank is taking a glass-half-full view of the Australian economy - that we will see a productivity improvement, that we will see the international economy lift Australia somewhat, and that the domestic economy will respond to that,’’ Mr Williamson said.

‘‘But I think the risks are to the downside there that we don’t see this response, and the Reserve Bank does need to provide more interest rate stimulus in coming months.’’

To cut or not to cut rates?

Sydney real estate agents welcomed the unchanged cash rate, saying that following a strong start to the property year, another rate would have been unnecessary.

‘‘Consumer confidence has improved so I actually think that it's not needed,’’ the chief executive of Starr Partners, Douglas Driscoll, said.’’

Ray White Lower North Shore auctioneer Peter Matthews said luxury properties were selling well.

‘‘We’ve traded six times what we traded in January 2012. People this year have decided not to sit and wait any more,’’ Mr Matthews said.

But the Australian National Retailers Association’s chief executive, Margy Osmond, said retailers were ‘‘anticipating a slow start to the year’’ because of the Reserve Bank’s decision.

‘‘Despite some weak inflation suggesting there is room to cut, the RBA has chosen to adopt a ‘wait and see’ approach. Retailers don’t need to be so cautious, they know what they will see.’’

Softening Australian economy

A recent spate of economic data has pointed to a softening Australian economy, with unemployment edged higher amid expectations that mining investment would peak in 2013.

The RBA's rates decision came amid a busy week of economic data.

Today, data released showed that new vehicles sales were up 11.3 per cent last month from the year before, while a Bureau of Statistics report revealed that house prices had risen 1.6 per cent in the fourth quarter of 2012.

UBS economist George Tharenou said the rise in house prices was much stronger than expected, but supported the broad trend that property values were picking up.

''I think the RBA's (Reserve Bank of Australia) interest rate cuts have made a material difference to housing affordability, which has improved to be the best in around a decade,'' he said. ''That has stimulated people to go out and pay more for homes.''

Mr Tharenou said the data, coupled with a rebound in equity markets, was evidence that household wealth was improving and pointed to further house price increases in coming months.

''At the same time, I'm not expecting the double-digit plus rebounds in house prices we saw coming out of the GFC (global financial crisis),'' he said. ''I think there's still a more subdued expectation of prospective house price gains.''

Australia's trade deficit also shrank more than expected to $427 million in December, seasonally adjusted, from $2.79 billion in November, as more iron ore was shipped to China.

Yesterday, a series of indicators highlighted that building approvals for December were weaker than forecast, while the ANZ job advertisements survey fell for the 11th straight month and and inflation remain subdued.

RBA interest rate decisions in current easing cycle

Dec 5, -0.25, to 3 per cent
October 3, -0.25, to 3.25 per cent
June 6, -0.25, to 3.5 per cent
May 2, -0.50, to 3.75 per cent

December 7, -0.25, to 4.25 per cent
November 2, -0.25, to 4.5 per cent

with wires


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