Published: Thu, November 07, 2019
Markets | By Otis Pena

Australia keeps rates on hold

Australia keeps rates on hold

"The risk of course with low rates is that they tend to fuel property prices".

In its post-monetary policy meeting statement, it said that it will continue to "monitor developments, including in the labour market, and is prepared to ease monetary policy further if needed to support sustainable growth in the economy, full employment and the achievement of the inflation target over time".

The agreement leaves in place the RBA's target of keeping inflation in a 2-3% band on average over the medium term, when there had been some speculation it might be widened to 1-3%, as followed by neighboring New Zealand.

He also ruled out requiring the RBA governor to explain any undershooting or overshooting of the inflation target in a letter to the treasurer, as is required of the governor of the Bank of England.

With the cash rate at 0.75%, the RBA has two more cuts to make - next February looms as the next possible date, although the December 3 meeting could see a cut if the RBA wants to send us away for the long summer break with an extra inducement to spending this year.

September's retail spending data fell well short of expectations, suggesting record low borrowing costs and $22.4 billion in tax refunds have yet to stimulate consumer spending.

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The RBA shaved its economic growth forecast for this year to 2.25%, from 2.5%, but still expected a pick up to 3% by 2021. In fact, overnight swaps are now pricing a 94.0% probability that the RBA will leave its benchmark interest rate unchanged, which is up quite significantly from the 60.4% probability on October 16 prior to the release of the high-impact Australia employment report that revealed the unemployment rate edged down slightly from 5.3% to 5.2%.

However, economists nearly universally predict further cuts are inevitable in the coming months.

For retailers and other businesses involved in the domestic economy it will be two more years at least of weak revenue growth and indifferent earnings - for all the mad headlines on house price growth which do not generate jobs or wage rises and do not contribute anything but to the bottom lines of News Corp (REA Group) and Nine Entertainment (Domain), parts of the real estate industry and state government coffers through higher stamp duty revenues. "But in the absence of more fiscal stimulus, pressure remains on the RBA for further easing", he said.

Annual inflation inched higher to 1.7 per cent in the September quarter, but has been below target for 15 consecutive quarters. Consequently, more easing will be required to achieve full employment and clear progress to the inflation target. Of the 13 economists surveyed, seven said what is needed most is fiscal stimulus, including extra government spending on infrastructure.

"Interest rates are very low around the world and a number of central banks have eased monetary policy in response to the persistent downside risks and subdued inflation".

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