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Cash Rate Remains Steady - No Rise

published  First Published: 02/02/2010
Article written by: David Wheaton
The Reserve Bank of Australia (RBA) has given some relief to home loan mortgage holders by leaving the official cash rate at 3.75 percent, surprising just about every market analyst.
It is the first time since its September board meeting the central bank has not lifted the cash interest rate. The RBA board did not meet in January.
RBA governor Glenn Stevens said the bank was waiting to evaluate the impact of past rate rises by itself and commercial lenders on the domestic economy.
The RBA had raised the cash rate by 25 basis points at each of its board meetings in October, November and December to a current 3.75 percent.
"Lenders have generally raised rates a little more than the cash rate over recent months and most loan rates have risen by close to a percentage point," Mr Stevens said in a statement accompanying the decision.
"Since information about the early impact of those changes is still limited, the board judged it appropriate to hold a steady setting of monetary policy for the time being."
Commonwealth Bank of Australia senior economist Michael Workman said while the decision was a "bit of a shock", the central bank was acting on feedback from lenders.
"They do indicate that credit remains very difficult for smaller businesses," he said.
Obviously, it is part of this view of what the lenders are up to and most probably imposing tighter credit conditions and higher interest rates on corporate Australia.
"That appears to be the reason why they have held back", said Workman.
AMP Capital senior economist Bob Cunneen agreed the RBA had paused this month to assess the impact of the rate rises on the economy made in the final quarter of 2009.
"It's really a board that's said `we've started tightening the screws, but there is no need for pushing on now'," he said.
"The bank seems to be taking a wait and see attitude as it waits to see the impact of the first three rate moves."
But Mr Stevens warned of the risk of future rate rises, given that most borrowing rates remained lower than average levels and the potential for annual inflation to defy its two to three per cent target band over the course of the economic cycle.
"If economic conditions evolve broadly as expected, the board considers it likely that monetary policy will, over time, need to be adjusted further in order to ensure that inflation remains consistent with the target over the medium term," he said.
Mr Workman said CBA expects further adjustment to the cash rate as soon as next month.
"At this stage, we assume there will be one (of 25 basis points) in March," he said.
"We are still of the view that the cash rate will be closer to five per cent at the end of the year than four per cent."
Debt futures markets have reduced the chance of the RBA lifting the cash rate on March 2 to 31 per cent, from 100 per cent before Tuesday's decision.
Housing Industry Association (HIA) chief economist Harley Dale said the RBA's decision to leave rate unchanged was appropriate.
"We have yet to see the full impact that the three consecutive rate increases at the end of 2009 will exert, so there was no burning need to hike rates a fourth time in five months today," Dr Dale said.



Related Article: How Does the Reserve Bank Decide?


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