The Reserve Bank has kept the official interest rate on hold at 0.75 per cent at Tuesday’s meeting, the last one for this year, sticking with its position that the economy has passed a “gentle turning point“.
The RBA statment says that due to the time required for lower interest rates to flow through the economy the board had decided to hold off making another cut.
“Given these effects of lower interest rates and the long and variable lags in the transmission of monetary policy, the board decided to hold the cash rate steady at this meeting while it continues to monitor developments, including in the labour market.”
It says the economy appears to have “reached a gentle turning point,” and that there was hope of an increase in spending by consumers as property prices rebounded.
“The low level of interest rates, recent tax cuts, ongoing spending on infrastructure, the upswing in housing prices and a brighter outlook for the resources sector should all support growth,” the statement says.
“[The low interest rate] has also boosted asset prices, which in time should lead to increased spending, including on residential construction. Lower mortgage rates are also boosting aggregate household disposable income, which, in time, will boost household spending.”
The central bank acknowledged that around the world, “Expectations of further monetary easing have generally been scaled back.”
Financial markets had priced in a slim 9 per cent chance of the central bank making a surprise fourth 0.25 percentage point rate cut, which would have reduced the official cash rate to 0.5 per cent.
Sydney, Melbourne lead turnaround
However the bank warned that one of the key risks in the domestic economy was that of house prices.
“Other sources of uncertainty include the effects of the drought and the evolution of the housing construction cycle.”
“There are further signs of a turnaround in established housing markets. This is especially so in Sydney and Melbourne, but prices in some other markets have also increased recently.”
The central bank did not change its comments on the employment market despite the jobless rate edging back up to 5.3 per cent since its last board meeting.
“A further gradual lift in wages growth would be a welcome development and is needed for inflation to be sustainably within the 2–3 per cent target range.
“Taken together, recent outcomes suggest that the Australian economy can sustain lower rates of unemployment and underemployment.”
While 75 basis points of rate cuts this year have pumped up property prices – Sydney is up more than 30 per cent in annualised terms – economists said there were few signs of the boost spreading beyond housing.
Property prices in the harbour city surged 2.7 per cent in November, the highest monthly growth rate since 1988, while Melbourne property values grew by 2.2 per cent over the same period, according to the latest CoreLogic Home Value Index.
Earlier today, the ABS reported a massive current account surplus of $7.9 billion, making it the first time two consecutive current account surpluses have been recorded in over four decades, driven by steady growth in exports of iron ore and gas.
The RBA decision comes ahead of quarterly economic growth figures, to be released on Wednesday, which will feed into the Morrison government’s budget update on December 16.
Victorian premier Daniel Andrews again urged the prime minister to unleash more fiscal stimulus at a CEDA lunch in Melbourne today, saying lower interest rates and income taxes have not done enough to get the economy going.