Reserve Bank interest rates: RBA leaves cash rate on hold at 1.5% – as it happened

Westpac foreign exchange experts think the RBA decision will see the Aussie dollar push upwards.

Noting today’s spike in the dollar, the Westpac team says that it could reach US70.8C but that would represent a “sell”:

We would expect this move in the A$ to continue to push towards 0.7060/80. However, above that level we remain of the view that the A$ is a sell on strength.

In a break from recent emphasis, the RBA did note that the A$ “is at the low end of its narrow range of recent times” suggesting that the combination of the recently weaker currency and strong commodity prices is seen as a positive for the Australian economy.

David Bassanese of Beta Shares, has this. He had predicted a cut.

No RBA rate cut today, but the hurdle has been lowered. According to the RBA Statement, “further improvement in the labour market was likely to be needed for inflation to be consistent with the target. That means the unemployment rate no longer needs to rise (to say 5.5% from 5%) to justify a rate cut, it just needs to stop falling. It has been broadly steady for the past six months, so more of the same will see the RBA move.

I expect the unemployment rate to reach 5.5% by early 2020 given the housing downturn and soft consumer spending. My base case view (since early February) of 50bps worth of cuts by late this year/early 2020 remains in place.

The folk at financial comparison site ratecity.com.au lament that it could now be a few more months until mortgage holders get some reduction in their monthly payments.

But they advocate instead that you shop around for a better deal and earn yourself a cut anyway. Here’s Sally Tindall, research director at the site:

Australia didn’t get a rate cut today, but it’s still not off the cards. Based on today’s statement from Phillip Lowe, its likely they’ll hold off until they see more consistent trends in employment and inflation. But consumers don’t have to wait for the RBA to save money on their home loan.

The downturn in the market is putting pressure on banks’ bottom lines. What they need is more business on their books. The best way for borrowers to get a rate cut is to turn themselves from an existing customer into a new one.

The inquest is well under way into why the RBA kept rates on hold.

Having predicted a cut, the Capital Economics team is surprised. They are especially surprised that the bank has only trimmed its bullish forecast for growth this year by 0.25% to 2.75%. They call the RBA statement “rather upbeat”, signalling that they really wanted to say “too upbeat”. Capital expect the bank will have to cut soon though.

In conclusion, they say:

We are far more pessimistic about the outlook for GDP growth, the labour market and inflation than the Bank as we expect underlying inflation to remain below the Bank’s 2-3% target range. The upshot is that we still expect rates to be lowered over the coming months.

The bank expects inflation – one of its key criteria in rate decisions – to pick up in the next year helped by higher petrol prices. That’s despite downward pressure from housing prices.

But it means that the RBA’s focus is now totally on unemployment. If it goes up, a cut is surely all but nailed on.

The inflation data for the March quarter were noticeably lower than expected and suggest subdued inflationary pressures across much of the economy. Over the year, inflation was 1.3% and, in underlying terms, was 1.6%. Lower housing-related costs and a range of policy decisions affecting administered prices both contributed to this outcome. Looking forward, inflation is expected to pick up, but to do so only gradually. The central scenario is for underlying inflation to be 1¾% this year, 2% in 2020 and a little higher after that. In headline terms, inflation is expected to be around 2% this year, boosted by the recent increase in petrol prices.

Here’s the full statement.

Talking of pelters:

So that last sentence does leave some room for the bank to cut next time. More than 80% of economists surveyed by finder.com think the bank will cut by August.

But Lowe is sticking to his long-held view that infrastructure spending will rally the economy and that household spending will follow in its wake:

The central scenario is for the Australian economy to grow by around 2¾% in 2019 and 2020. This outlook is supported by increased investment in infrastructure and a pick-up in activity in the resources sector, partly in response to an increase in the prices of Australia’s exports. The main domestic uncertainty continues to be the outlook for household consumption, which is being affected by a protracted period of low income growth and declining housing prices. Some pick-up in growth in household disposable income is expected and this should support consumption.

The RBA has judged that the economy is OK for now and doesn’t need stimulating with lower interest rates.

Governor Philip Lowe said in his statement that:

The board judged that it was appropriate to hold the stance of policy unchanged at this meeting. In doing so, it recognised that there was still spare capacity in the economy and that a further improvement in the labour market was likely to be needed for inflation to be consistent with the target. Given this assessment, the board will be paying close attention to developments in the labour market at its upcoming meetings.

The tension is mounting. And could there be a few nerves at RBA headquarters in Martin Place?

It’s worth noting that the RBA governor, Philip Lowe, has yet to either cut or increase interest rates in his two-and-half-year tenure. Quite a record. The last time they moved was downwards in August 2016.

Strong views as well from uber-dove Stephen Koukoulas. He has long called for rates to come down to stimulate the economy. He argues that the RBA – by following its strict criteria for cutting where inflation must be falling and unemployment also rising – has done nothing less than fail the nation:

CommSec reckons there is a 44% chance of cut but there’s a lot of speculation around so what are people saying:

Eleanor Creagh of Saxo Capital Markets reckons the RBA will hold.

But independent economist and market strategist Greg McKenna reckons it must be a cut:

Others prefer to hedge their bets:

Good afternoon and welcome to our live blog on the Reserve Bank’s monthly decision on interest rates. The board is meeting in Sydney and a decision is expected at 2.30pm. The big question is whether or not the board will cut the rate from it’s already historic low of 1.5% as the economy faces headwinds including weaker growth, stagnant wages, very low inflation and falling house prices.

It’s been more than two years since the last cut. In each of the past 29 meetings the board – led by governor Philip Lowe – has decided to keep rates just as they are. But a growing number of economists now expect a cut either today or in the next two or three months.

To get you started, look no further than our own economics expert, Greg Jericho, who has forecast in his regular column this morning that the RBA will keep rates on hold – but only just. He judges that the RBA will not want to be seen cutting rates during the election campaign and will instead more likely wait until next month.

You can read his whole article here: