THE Reserve Bank will keep interest rates on hold for at least another two months as it waits for the recent dose of “monetary medicine” to wash through the economy, analysts believe.
Following a series of upbeat developments in Australia and abroad, leading economists say the central bank will sit tight until the last quarter of the year.
Their forecasts came after the RBA board, in its monthly meeting yesterday, kept the official cash rate on hold at 3.5 per cent for a second consecutive month.
In a statement released after the meeting, Governor Glenn Stevens said there was “a more subdued international outlook than was the case a few months ago”.
Inflation was within the central bank’s target range and economic growth was “close to trend”, he said, so the current monetary policy setting was appropriate.
But he warned the exchange rate remained “high” and noted it was too early to assess the full impact of recent interest rate cuts, with the base rate falling 1.25 percentage points between November and June.
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The Australian dollar is hovering at about $US1.06 — its highest level since March.
According to betting on futures markets, there is about a 90 per cent chance that the cash rate will fall 0.5 percentage points by the end of the year — with the first cut in October.
Most economist are less optimistic, tipping just one more cut in 2012 ahead of a final reduction in this cycle, pencilled in for early next year.
HSBC chief economist Paul Bloxham said the RBA was “ahead of the game” and the domestic economy was travelling well.
“(But) we still expect the global slowdown and possibly the high Australian dollar will see a further RBA cut of 25 points in the fourth quarter,” he said.
The RBA warned Europe would remain a “significant area of weakness”.
But in his statement, the central bank governor said concerns about the extent of China’s slowdown had eased and the world’s second biggest economy appeared to have bottomed out.
Mr Stevens noted domestic house prices had firmed in recent months and business credit was growing at its fastest rate for several years — signs the Australian economy was improving.
“In Australia, most indicators suggest growth close to trend overall,” he said.
“As a result of the sequence of earlier decisions, monetary policy is easier than it was for most of 2011, with interest rates for borrowers a little below their medium-term average.”
Housing Industry Association chief economist Harley Dale said while the decision was “widely expected” it would provide no solace for a struggling construction sector.
The latest construction sector data shows activity contracted for a 26th consecutive month.