Interest rates stuck in holding pattern

The monetary policy decision on Tuesday indicated the central bank’s concern for a slack labour market, Mr Eslake said. "They (the RBA) conceded for the first time there was certain degree of slack in the labour market. "[The] unemployment rate is a key indicator of the amount of slack spare capacity in the economy.

RBC Capital cast its vote on a rate rise in the fourth quarter of 2015. "As long as there are signs of policy traction, particularly in housing, rate cuts are unlikely," RBC Capital head of strategy Su-Lin Ong said in a note. "But, the modest rotation of growth, degree of labour market slack, and well-behaved inflation outlook suggest rate hikes are also not on the agenda.

On JP Morgan’s analysis, the rate hike will not kick in until August 2015 despite the high exchange rate. "The domestic economy is underperforming… but we doubt it is soft enough for the RBA to contemplate a rate cut in the near term," Stephen Walters, JP Morgan’s chief economist, said in a note. "Nor does the elevated Australian dollar justify easing at this stage - the RBA has other tools in its kit to deal with currency strength. "Similarly, we suspect officials are wary that a rate cut now would add to growing signs of frothiness in the housing market.

NAB and RBC Markets are betting on a rate hike in late 2015. "Historically the Reserve Bank has never initiated a cycle of raising rates until after unemployment has clearly peaked," Bank of America Merrill Lynch chief economist Saul Eslake said.

At the monthly board meeting on Tuesday, the central bank kept the cash rate on hold at 2. 5 per cent for the 12th consecutive meeting, marking the longest period of steady rates since 2006.

RBA governor Glenn Stevens said in the statement accompanying Tuesday’s rate decision that "the most prudent course is likely to be a period of stability in interest rates," despite the Australian dollar being stuck in the tight trading range between US92¢ and US93¢.

On UBS‘s forecast, the central bank is expected to raise the interest rate to 2. 75 per cent in May 2015 and to 3 per cent in June 2015 as the labour market recovers.

But until then, the interest rate is likely to remain static. "It is the most boring central bank in the world for the market," reckons UBS interest rate strategist Andrew Lilley.

Barclays: RBA will start "to raise rates in Q1 2015 as the economy improves and with the cash rate at 3. 5 per cent by the end of that year".

On CBA‘s analysis, the interest rate rise could be as early as February 2015. "The RBA has been too pessimistic on growth and too optimistic on inflation," CBA economist Diana Mousina said.

The Reserve Bank of Australia is on track to break its record for the longest spell of cash rate inertia, with most major economists forecasting the central bank will sit on its hands well into 2015.

Read more here: SMH


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