RBA cash rate on hold as outlook improves

The Reserve Bank of Australia kept the cash rate unchanged for a fourth straight month, and another rate cut in the new year is not a certainty.

The decision to leave the rate at a record low of 2.5 per cent was fully expected, with all 14 economists surveyed by AAP last week forecasting no change at the RBA’s December board meeting.

The short statement by RBA governor Glenn Stevens that comes with the decision was almost the same as last month.

He reiterated that the local economy is starting to rebalance away from one that is mainly driven by mining and resources investment.

“There has been an improvement in indicators of household and business sentiment recently, but it is still unclear how persistent this will be,” Mr Stevens said

Commonwealth Bank economist James McIntyre said sustained strength in the housing and equity market is bolstering the view that interest rate cuts over the past two years are taking effect.

“The recent run of data has probably delivered in terms of demonstrating policy is having an impact on the economy,” he said.

“The improvements in housing finance, price rises and lift in building approvals are consistent with policy driven recovery.”

The next scheduled RBA board meeting is not until February 4, which Mr McIntyre said will allow time for a clearer picture if another cash rate cut is likely.

“An extended run of data should deliver a clearer idea on whether interest rate sensitive sectors of the economy are beginning to fire,” he said.

Mr Stevens again said the Australian dollar is still “uncomfortably high”, despite recent weakness.

“A lower level of the exchange rate is likely to be needed to achieve balanced growth in the economy,” the RBA governor said.

St George Bank senior economist Hans Kunnen said most people would have expected more commentary from the RBA on the exchange rate.

“They’ve said all they need to say, it’s too high and needs to come down, and probably will,” he said.

“While the recent rhetoric on currency intervention may have kept the Australian dollar weaker in recent weeks, overseas developments will be the overwhelming drivers for the currency.

“I think the big hope for the RBA and the Aussie dollar is the US tapering its bond purchases sooner rather than later.”

A series of economic stimulus programs by the US Federal Reserve in recent years have been the main factor weighing on the US dollar and kept the Australian dollar above 90 US cents.

© 2013 AAP