Mortgage-holders' hopes that the Reserve Bank will cut interest rates in the immediate future have been dashed, with the central bank signalling only that the scope for a cut ''is increasing.''
- Rates remain at 12-year high of 7.25%
- RBA says inflation will fall below 3% by 2010
- Dollar drops about one-third of a US cent
The central bank today left its key official rate unchanged for a fifth month at 7.25%, as widely expected, at its regular monthly board meeting.
Borrowers, however, had been hoping for the RBA to indicate that its main concern had now switched from bringing down inflation to averting a stalling in the overall economy.
That shift would have been a prelude to a cut in the official rates from their 12-year highs in coming months, the first such reduction since December 2001.
Reserve Bank Governor Glenn Stevens said that ''it is looking more likely that demand will remain subdued, and economic growth will be fairly slow, over the period ahead.''
Even so, the statement added ''The Bank's forecast remains that inflation will fall below 3% during 2010.'' In other words, the RBA hasn't changed its view that inflation - now at 16 year highs - will remain above its target range of 2%-3% for another year and a half.
The statement's final paragraph is the closest Governor Stevens comes to a shift in its stance:
''Nonetheless, with demand slowing, the Board's view is that scope to move towards a less restrictive stance of monetary policy in the period ahead is increasing.''
The change, while important, is not yet a green light for immediate rate cuts, Stephen Roberts, research director at Lehman, told Reuters.
''They left rates unchanged but there is an indication that there is scope to move to an easing monetary policy stance," Mr Roberts said, ''There is no timeframe. They still talk about uncertainty both ways, in terms of the inflation and the growth outlook.''
''I have the sneaky feeling that they will be waiting for November,'' Mr Roberts said.
Dollar drops
Financial markets are taking the view that the less restrictive stance is not far off. The Australian dollar shed about one-third of a US cent after the statement, dropping to as low as 92.45 US cents.
Interest rate futures, though, barely budged. Investors are betting there will be the equivalent of three rate cuts by 12 months' time, or 72 basis points, according to Credit Suisse. That measure, though, was little changed from the 69 basis-points expected prior to the 2.30pm announcement.
Proof that the economy has been slowing is mounting. A monthly gauge of the services sector by the Australian Industry Group out earlier today reported the worst result since the survey began in February 2003.
Retail sales in June shrank while housing prices are flat or falling in most capital cities, and business confidence is crumbling.
The RBA notes the evidence of a slowing economy:
''The evidence is that the tightening in financial conditions, in conjunction with other factors including rising fuel costs, and lower asset values, has restrained demand. Indicators of household spending have continued to record subdued outcomes over recent months, and credit expansion to both households and businesses has slowed significantly.
Surveys suggest a softening in business activity, and there have also been some early signs of an easing in labour market conditions.''
Employment figures out on Thursday will show whether those that "easing" in labour markets is translating into job losses. Economists are tipping the economy added 5,000 jobs in July.
The central bank and the government have repeatedly warned in recent months that higher commodity prices would send a wave of extra demand sweeping through the economy.
Most other sectors in the economy, though, are struggling. A monthly gauge of the services sector by Australian Industry Group out earlier today reported the worst result since the survey began in February 2003.
Retail sales in June shrank while housing prices are flat or falling in most capital cities.