The construction and retail industries may be trashing the Reserve Bank for keeping the official interest rate on hold yesterday, but economists say it’ll be a while before they see any relief.
Reserve Bank governor Glenn Stevens said yesterday in a statement the board decided to keep rates steady as the economy continues to grow at trend, although opponents say individual industries are hurting and require assistance.
ANZ economist Warren Hogan told SmartCompany this morning the RBA is comfortable with the economy’s movements, and as a result won’t move until any significant positive or negative move mandates a change.
“Interest rates will remain within a percentage point of where they are now for a very long time,” Hogan said.
“The RBA is comfortable with where the economy is now. Interest rates are currently at their average levels, and inflation is well behaved.”
Although Hogan says the RBA will be willing to cut rates if the economy weakens, it would need to be a major shift – and that’s most likely to come from Europe.
“They could cut if the economy goes down but, that being said, they may even be looking at rate hikes again if the economy picks up by the end of the year.”
CommSec chief economist Craig James had a slightly more concrete prediction, suggesting the RBA will move in May and cut the rate by 25 basis points. However, he agrees the bank is “happy where it is right now”.
“It’s going to take a fair bit to budge it. You need a material weakening in terms of demand.”
Yesterday’s decision comes after two consecutive rate cuts in November-December, and a halt in February. However, consumer confidence has been battered after the major banks all increased their mortgage rates.
But James says the RBA will need to see more than a slight softening in the economy in order to make a major move in rates.
“We’d want to see something quite significant. Of course, they can’t rule out a Greek deal blowing up if that causes mayhem. It’s very much tied to Europe.”
The retail and construction industries have complained about the decision, requesting more support for their industries.
ARA executive director Russell Zimmerman said in a statement the decision provided no relief for retailers.
“At the end of the day retailers have to make decisions based on the pressures they’re currently facing, and unfortunately this may mean further store closures and job losses,” Zimmerman said.
Meanwhile, Housing Industry Association chief economist Harley Dale also criticised the move, saying pain in the domestic economy justified a rate cut.
“A rate cut today would have been the appropriate action to take,” he said.
Patrick Stafford is a freelance journalist and a former deputy editor of SmartCompany.
