Interest rates remain at 4.25%

Australian borrowers will have to wait at least another month for more interest rate relief after the Reserve Bank many  by leaving its key rate unchanged.

The RBA kept interest rates on hold today, suggesting that they are relatively happy with the way inflation and our economy is performing.

This was a massive surprise for both the financial markets and most economists.

The markets were pricing in an 80%-plus probability of a cut only a few days ago, and it had gone as high as 100%. Only three of 27 economists surveyed by Bloomberg picked today’s decision.

There are 2 ways to view the RBA’s decision;

As home owners we love it when interest rates fall and our mortgage repayments drop, but on the other hand the RBA’s decision is a sign of it’s increasing confidence in our economy.

Housing markets struggled in 2011 with all capitals showing falling median house prices. Sydney was the best performer over the year with prices down by 1.3%

Interest arte cuts improve housing affordability and improve buyer and seller confidence

A reduction in interest rates would have also helped our economy that has struggled in parts over the last year.

While I see many of our property markets turning around over the coming year, a drop early in the year would have given the market a shot in the arm and helped build buyer activity.

Another viewpoint

In Property Observer economist Chris Joye welcomed the decision.

He said: With the recent pick-up in growth in the world’s largest economy, the rebound in the US labour market (where the unemployment rate fell from over 9% to 8.3% today), a very benign soft landing in Australia’s two major trading partners, China and India, and an only so-so domestic inflation report that left underlying consumer price pressure at 2.6% over the last year, sitting on the sidelines and waiting for more information made a great deal of sense.

We have also seen more positive housing data, with national dwelling prices grinding out a slight seasonally adjusted rise over the months of November and December (taken together).

A more worrying development for the RBA has been partial information implying a return of inflationary pressures. The monthly TD Securities-Melbourne Institute benchmark has recorded a strong increase in its core measures of Australian inflation on a three-month annualised basis, as the chart below shows.

What will the banks do now?

One interesting question is what the major banks do now.

Recently they have complained about their cost of funding and hinted that they would not pass on the full rate cut if the RBA dropped rates.

Does this mean that the banks will raise rates?

I don’t think so. There would be too much consumer backlash.

What happens next?

The RBA has made it plain there is a case for cutting rates again if economy weakens “materially”.

Also, if the Australian dollar rises significantly further, inflation eases by more than anticipated, or if bank funding pressures intensify (the RBA has recognised that funding costs are now above the levels of mid-2011), another easing is possible.

I’m sure there will be much more discussion about this in the month ahead.


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'Interest rates remain at 4.25%' have 2 comments


    February 8, 2012 Ian Payne

    The unsubtle big 4 (fabulously profitable) banks didn’t help.
    They’d made it clear they wouldn’t pass on the whole reduction, so the RB was not averse to rebuffing them, quietly letting them know they were not happy to merely line their coffers.
    All borrowers should tell their banks they expect an appropriate and reasonable response to any future RB reduction would be to pass on all or almost all of any future concession they receive.
    Sure, investors are entitled to good returns from their investment in bank shares, but that has to be tempered with the realisation that good corporate performance involves good citizenship.


      Michael Yardney

      February 9, 2012 Michael Yardney

      Thanks for the good comments.
      It was good when we had more competition form a group of second tier banks who would keep the big banks “honest.”


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