RBA holds cash rate at 2.50% for May
In a decision that was predicted by many of our expert panel, the Reserve Bank of Australia (RBA) has announced the cash rate will remain on hold at 2.50%.
The monthly statement from Glenn Stevens, Governor of the RBA, focused on positive signs in consumer demand, housing and business conditions.
“Recent information suggests moderate growth is occurring in consumer demand and foreshadows a strong expansion in housing construction. Some indicators of business conditions and confidence have improved from a year ago and exports are rising,” Mr Stevens said.
Every financial expert surveyed in our monthly RBA panel correctly predicted the rates would stay on hold, many citing the low inflation rates from last week.
According to Michael Blythe from the Commonwealth Bank, “The Reserve Bank has said pretty clearly that they want a period of stability in interest rate settings, and with a low inflation number last week they are certainly able to keep sitting on their hats for the time being.”
Shane Oliver from AMP said that “there are only early signs of the recovery in the non-mining economy, it's also the case where the Australian dollar is a little bit stronger. Hence the inflation concerns that they may have had at the end of last year and earlier this year have probably moderated from that point of view.”
But while inflation was agreed by many of our experts to be showing positive uplift, other sectors were more worrying.
John Symond from Aussie said that “the economy continues to show patchy signs of recovery, with a continued pickup in housing, but sluggish performance in other sectors. The inflation rate remains in the Reserve Bank’s comfort range of under 3 percent, while the unemployment rate continues to be of concern.”
Lisa Montgomery from Resi Home Loans spoke about the April decision and what the RBA had to say. “In the minutes of their last meeting, the board were strong to point out that if the economy continues to evolve broadly, there would be no need to raise rates anytime soon.” she said.
Forecast of the month
No interest rate movement by the RBA on Tuesday, we expect that Interest Rates will remain stable for an extended period. The current up-ward correction in residential property has removed the option of any consideration for further interest rate reductions to the RBA. We believe that any move to interest rates by the RBA is more likely to be up-wards ,however this will not occur till the effects of the fiscal measures which are to be released in the May Budget are assessed, most likely an increase of 25 basis points around March 2015.
Based on the severity of expenditure cuts being foreshadowed, our expectation of an increase in March 2015 may be viewed by some as flawed as it is normal that the contractionary impact of such cuts will bring about a rate reduction , as one will expect that the unemployment rate will increase. Our view though is that the expenditure cuts will be severe , but not extremely severe as alluded, and whilst the private sector is not likely to fill the gap we expect that the Government will also in the budget, announce substantial expenditure commitments (the highest ever ) for Infra structure projects.
We expect that the Government will chose to fund such projects through the issuance of Government Bonds ,which in fact other than the interest costs, the actual expenditure does not impact the budget. The issuance of such bonds ,added to an offer of joint participation from private investors in certain projects ,will probably be sufficient to counteract the contractionary budgetary cuts in other areas and somewhat most likely place some up-ward pressure on interest rates. We hope and expect that the Government will use a balanced combination of fiscal and monetary measures to take the Country forward as either on its own will not work.
When will a rate change occur?
While all our economists agreed the rate would remain on hold, what they couldn’t agree on is when they would rise. Five out of twelve economists believe there will be a rate rise by the end of this year, while three think it will not occur until 2015.
Paul Bloxham from HSBC thinks there’s a good chance that rates will increase just before the end of the year, while Nathan McMullen from RAMS believes there will be a 25 basis point increase in mid-2015.
Steven Pambris from the Bank of Sydney believes that “any move to interest rates by the RBA is more likely to be upwards, however this will not occur till the effects of the fiscal measures which are to be released in the May Budget are assessed , most likely an increase of 25 basis points around March 2015.”
What does this mean for borrowers?
With the prediction that interest rates will be rising soon, borrowers should compare their home loan options and see if they can get a better deal.
Michelle Hutchison, Money Expert at finder.com.au said that as banks don’t always pass on rate cuts it’s important to stay ware of your options.
“Don’t let your lender determine the cost of your home loan. It’s time to make a stand and make your lender work harder by comparing home loans online, asking for a discount or switching to a cheaper deal.”