• RBA leaves interest rates on hold

    25 Jun 2015
  • The Reserve Bank has left the official cash rate on hold at its historic low of 2.0 per cent, although economists have flagged a further cut could be on the cards for August.

    The RBA cut rates last month citing weak business investment and slowing Chinese growth, following an earlier cut from 2.5 to 2.25 per cent in February.

    Today’s decision was widely expected by the market. Comparison website Finder.com.au said all 34 experts surveyed in its Reserve Bank survey predicted the cash rate would remain on hold.

    It found borrowers are more concerned than ever about rising interest rates, despite three years of rate cuts and the cash rate on hold at a record low.

    “There’s no doubt it will be a shock to the system for many borrowers when interest rates rise,” said Finder.com.au money expert Michelle Hutchison.

    “We haven’t seen a rising interest rate cycle for almost five years, as the last time there was a cash rate hike was in November 2010. There are 419,566 first home buyers who have never experienced what it’s like to pay higher repayments.”

    According to comparison website Mozo.com.au, May’s rate cut saw less generous changes from the banks across term deposits and home loans compared with February.

    Variable home loans dropped by an average of 0.23 per cent in February and 0.21 per cent in May. The average home loan rate at end February was 4.98 per cent, but is now 4.72 per cent. The average nine-month term deposit rate was 2.75 per cent at the end of February, and is now 2.48 per cent.

    AMP Capital chief economist Dr Shane Oliver said the likelihood of the RBA cutting another 25 basis points after its August meeting, when it will release its revised economic forecast, was now “about 50-50”.

    He said prior to last week’s disappointing capital expenditure figures he would have put the likelihood of another rate cut at about 40 per cent.

    Business investment in capital goods like buildings and equipment fell by 4.4 per cent in the March quarter, worse than economists’ forecasts of 2.4 per cent.

    Speaking at Senate estimates yesterday, Treasury Secretary John Fraser said the figures were on the low side of expectations, but not enough to alter its broader economic budget forecasts.

    Bank of America Merrill Lynch economist Saul Eslake said he questioned the wisdom of this year’s rate cuts. “The RBA has cut rates twice this year in response to successive downward revisions in its economic growth forecasts,” he said.

    “I understand why they’re doing it, but I fear they risk overstimulating the wrong sector of the economy which doesn’t need any stimulating, namely housing.”

    Mr Eslake said the successive interest rate cuts were doing little to stimulate business investment in the non-mining sectors of the economy, while driving up house prices in the overheated Sydney and Melbourne markets.

    “As [Reserve Bank governor] Glenn Stevens said many times last year, you can lead a horse to water but you can’t make it drink,” he said. “What’s missing are the so-called animal spirits, the confidence to invest. In my view lower interest rates doesn’t alter that.”

    AMP Capital’s Dr Oliver said businesses had “gone back into their shells”. “There is an element that business expectations for required rates of return are still too high,” he said, referring to so-called ‘hurdle rates’.

    “There is a need to adjust to a new lower-return world, which means lower returns on everything, from housing to actual investment projects.”

    The good news is the economy hasn’t collapsed completely, he said, but it was stuck in “no man’s land”. “It’s not strong enough to keep unemployment from rising, and it should be growing at around 3 per cent but it’s stuck somewhere in the 2s.”

    According to Finder.com.au, 56 per cent of borrowers who have recently purchased a property or are planning to buy in the near future are concerned about rising interest rates — 33 per cent more than last year.

    Almost one in three (28 per cent) of the 1,100 surveyed were planning to fix their home loan, while 25 per cent were choosing to split their loan with part fixed and part variable. Since November 2010, the average first homebuyer loan size has increased by $37,000, or 13 per cent, to a record high of $326,000 in March 2015.

    In a statement, governor Stevens said the Australian economy had continued to grow, but at a rate “somewhat below its longer-term average”. He noted that dwelling prices continued to rise in Sydney.

    “The Bank is working with other regulators to assess and contain risks that may arise from the housing market,” he said.

    Last month the RBA was criticised for giving the impression it was potentially finished cutting rates, which pushed up the Australian dollar. Today’s statement has also taken a ‘wait and see’ approach.

    “Information on economic and financial conditions to be received over the period ahead will inform the Board’s assessment of the outlook and hence whether the current stance of policy will most effectively foster sustainable growth and inflation consistent with the target,” the RBA said.

    The Australian dollar rose by more than a quarter of a US cent following the rate hold. At 1433 AEST, the currency was worth 76.59 US cents, up from 76.29 US cents shortly before the RBA’s decision was announced.

    The share market fell slightly, with the S&P/ASX200 at 5,662.9 points at 1433 AEST, down from 5,672.2 points just prior to the RBA’s announcement.

     

    - Credit: news.com.au

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