How long will rates hold?
Business Day reporter Chris Zappone examines the latest rates announcement from the Reserve Bank.
The Reserve Bank has kept interest rates on hold, giving households more time to pay bills before an expected rising cycle begins.
The cash rate remains at 3 per cent where the RBA moved it in April in an effort to kick-start the economy in the face of a global downturn.
While today's decision by the RBA board was widely expected, analysts are tipping a rise before the end of the year, as signs of an economic revival increase. (Read commentary by Malcolm Maiden and Michael Pascoe.)
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The RBA gave an indication that it is starting to worry more about inflation again, which points to an earlier rather than later rate rise.
"Underlying inflation should continue to moderate in the near term, but the likelihood of inflation being persistently below the target now looks low," the Reserve said in its statement.
JPMorgan economist Helen Kevans said the RBA may have adopted a "very mild tightening bias".
While painting a brighter picture of the global economy in the statement, the RBA suggested "that in the near term ... inflation may not be below target for too long," she said. "So that’s key to the rates outlook."
Ms Kevans said she expects the first rate rise in October, with the central bank taking gradual 25 basis point steps.
However, the dollar lost ground shortly after the RBA's verdict as traders reduced their bets of an early rate rise. The dollar was recently buying 84.26 US cents, about one-fifth of a US cent less than before the announcement.
The RBA has chopped 4.25 percentage points off interest rates – cutting $746 off the average monthly repayment on a $300,000 25-year home loan - since last September in an effort to shield Australia from the worst effects of the global recession.
Credit markets are pricing in a cash rate of 5 per cent within the next year, well above the current 3 per cent level. Such a move would increase the average monthly repayment on a 25-year, $300,000 loan by about $330 per month.
Look ahead
Tomorrow the RBA will learn whether the economy expanded or contracted in the second quarter.
Data released today showed Australia's seasonally adjusted current account deficit doubled to $13.35 billion in the June quarter from $6.35 billion in the March quarter.
The widening trade deficit contained in the current accounts is expected to detract 0.2 per cent from the second quarter GDP.
Before the release of the current accounts data, economists forecast Australia's economy to grow by 0.6 per cent in the second quarter.
In a postive sign, building approvals data, also released today, rose by 7.7 per cent in July from 9.3 per cent in June, raising hopes of a housing sector recovery, an objective of the RBA and the Federal Government.
czappone@fairfax.com.au
BusinessDay, with Reuters
