Surprise Hold on Rates: Reserve Bank

Interest Rates

Market expectations were subverted this week with the Reserve Bank of Australia (RBA) announcement that cash rates would remain at 4.25 per cent. After popular predictions that interest rates would be slashed after last year’s cuts, this latest move from the RBA comes amid signs of improvement in the global economy and a steadier property market.

RBA Governor Glenn Stevens noted how these recent rates cuts have impacted up on the property market: “housing prices showed some sign of stabilising at the end of 2011, after having declined for most of the year” he said in a media release this week. MICM Property also observed that this stimulus to a slow market in 2011 assisted in affordability, which in turn led to increases in buyer activity into this year.

Soon after the Reserve Bank’s announcement, Treasurer Wayne Swan observed to parliament that the unexpected move has struck “a balance between global uncertainty on the one hand and Australia’s strong economic fundamentals on the other.” Economists too are certain that this is an optimistic sign the global economy may be picking up growth.

Stevens was cautiously optimistic in reviewing the economic situation around the world. He noted that recent US economic numbers, including last week’s payroll data, have also been better than expected, as well as “the acute financial pressures on banks in Europe were alleviated considerably late in 2011 by the actions of policymakers. Financial market sentiment, though remaining skittish, has generally improved since early December.”

Overall, many economists took this week’s rates pause to mean the RBA was more confident about Australia’s economic outlook than many had expected.

With growth predicted to be close to trend and inflation on target, the RBA will be alert to further easing of the markets into 2012. “The Board will continue to monitor information on economic and financial conditions and adjust the cash rate as necessary to foster sustainable growth and low inflation.”