The Reserve Bank has flagged the interest rate cutting cycle is over, as the recovery of the Australian economy unfolds.
The central bank kept the official cash rate on hold today for the fifth consecutive month at 3 per cent, a 49-year low.The decision met the expectation of the financial markets, which had judged the prospect of a rate reduction at less than 5 per cent.
In a statement accompanying the decision, RBA governor Glenn Stevens said economic conditions in Australia were improving and the downside risks to the global economy had diminished.
“The board's judgement is that the present accommodative setting of monetary policy is appropriate given the economy's circumstances,” Mr Stevens said.
“The board will continue to monitor how economic and financial conditions unfold and how they impinge on prospects for sustainable growth in economic activity and achieving the inflation target.”
His statement dropped a reference made in last month’s statement that “scope remains for some further easing of monetary policy, if needed”.
The RBA has adapted an upbeat tone in recent weeks which has prompted rates markets to rally. The interbank futures market now predicts there will be at least five interest rate hikes by August next year.
“Economic conditions in Australia have been stronger than expected a few months ago with both consumer spending an exports notable for their resilience,” Mr Stevens said.
“Measures of confidence have recovered a good deal of ground. This suggests that the risk of a severe contraction in the Australian economy has abated.”
Mr Stevens also said the rising Australian dollar would help keep downward pressure on moderating inflation.
The local currency shot to a fresh ten-month high today.
After the rates announcement, it surged to US84.66c but then later eased to US84.34c, still up from yesterday’s domestic close of US83.58c.
“Inflation is gradually moderating given the earlier decline in energy and commodity prices and the effects of weaker demand on prices and labour costs,” Mr Stevens said.
“Given the current prospects for demand and output, this moderation should continue over the year ahead. The higher exchange rate over the recent months will assist in this moderation, at the margin.”
The core inflation rate dropped from 4.2 per cent to 3.9 per cent for the June quarter.
George Tharenou, an economist at investment bank UBS, said the RBA would now adopt a neutral policy stance towards interest rates over the next few months.
The interbank futures market is pricing 148 basis points worth of rate hikes, almost six rate hikes, by August next year.
“As we have been highlighting, the next moves in the cash rate is likely to be up,” Mr Tharenou said.
“However, given that the RBA likely still sees the outlook for the global economy to remain sub-trend for a while yet.”
The Housing Industry Association managing director Ron Silberberg said there was a risk that sharply higher interest rates could jeopardise the recovery and sustainability in new home construction.
“It will be important to keep interest rates stable over the next year to support activity and confidence as a tentative housing recovery runs into the headwind of rising unemployment,” he said.
“The reductions in variable home mortgage rates have played a pivotal part in stimulating new housing supply but the industry outlook is by no means assured.
“Ordinary home buyers could be excused for becoming confused by the constant speculation about busts, bubbles and booms.”
Mr Stevens last week warned in a Sydney speech of the risk of an artificial bubble being created if property prices stayed high without there being an increase in housing supply.
