Australian Interest rates kept on hold, cuts predicted

Interest rates kept on hold, cuts predicted

AS expected, the Reserve Bank has kept official interest rates steady today at a 12-year high of 7.25 per cent, in line with expectations. The decision was widely tipped, with all 19 economists surveyed by AAP expecting the RBA to leave the cash rate steady.

Reserve Bank governor Glenn Stevens indicated in a statement that while the board felt it was appropriate to keep rates steady this month, relief could be in sight.

"Weighing up the available domestic and international information, the board judged that the cash rate should remain unchanged this month. 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," he said.

Interest rates 'won't go higher' ANZ chief economist Saul Eslake said the statement give a clear impression that interest rates have peaked. "That's an indication not only that there aren't going to be any more increases in interest rates but raises the question of when do they cut," Mr Eslake said. "The statement does not give any clues as to when that might be."

The central bank reaffirmed its forecast for inflation to fall back within its 2 to 3 per cent target band during 2010. Mr Eslake said moves this year by commercial banks to raise their borrowing rates independently of RBA decisions has been a "critical factor altering their thinking" about the economy.

"Additional rises in market interest rates and tougher credit standards have delivered some additional tightening of financial conditions without them having to lift a finger," Mr Eslake.

"That's clearly had some impact on the economy."

Rates cut by Christmas?

Lehman Brothers chief economist Stephen Roberts said Mr Stevens' statement about a "less restrictive" monetary policy stance had increased the possibility of an interest rate cut by the end of 2008.

"There could be one by Christmas - they're going to wait for more data," he said.

"They've got an easing bias but there's no timing on that ... they're not in a particular rush to change.

"They talk about uncertainty weighing on both inflation and growth."

Mr Roberts, who is forecasting rate cuts in the March quarter, said the RBA would not move on interest rates until at least after the October 22 release of September quarter consumer price index data.

"They did talk about inflation remaining high in the short term, but on balance economic growth remains subdued," he said.

But the banks aren’t necessarily listening. Commonwealth Bank chief executive Ralph Norris last month refused to guarantee that CBA would cut interest rates if official rates were cut.

Full story at news.com.au

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