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RBA to set new Australian record

The Reserve Bank of Australia will set a new national record when it meets in the New Year to decide on monetary policy.

The RBA could break its current record of keeping rates on hold for 16 consecutive months if it decides against changing the cash rate in February.

Alternatively, if rates are cut, they will reach a new record low of 2.25 per cent.

HIA chief economist Harley Dale told Mortgage Business that while the likelihood of a rate cut has increased in recent months, the HIA house view is that rates will remain on hold.

“If we get to February next year and they don’t alter rates, which is our prediction, that will be the longest period in Australia’s history that the Reserve Bank has ever gone without changing interest rates up or down,” Mr Dale said.

“If instead of that outcome we got a decision by the Reserve Bank board to cut rates, that in its own right is not telling a particularly positive story about what the bank sees as the short- to medium-term prospects for growth and employment outcomes in the economy.”

The minutes of the Reserve Bank’s 2 December meeting, released Tuesday, note that the current cash rate setting was the best way to stimulate sustainable growth while keeping inflation between two and three per cent.

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"Members considered that the most prudent course was likely to be a period of stability in interest rates," the minutes said.

"They noted that market expectations implied some chance of an easing of policy during 2015 and discussed the factors that might be producing such an expectation."

Westpac and NAB recently forecast that the cash rate would fall to two per cent in 2015.

Westpac expects cuts in February and March, while NAB expects cuts in March and August.

If rates are cut, HIA’s Harley Dale sees no reason why the majors wouldn’t pass it on by reducing borrowing costs for customers.

“Let’s face it, if you were to see a cut in rates – and for the record that is not our view at the moment, we think they will remain on hold – but if you were to get a cut, that would presumably be reflecting the expectation that without such a cut there was going to be a material deterioration in economic conditions relative to what was previously thought,” Mr Dale said.

“The banks wouldn’t be doing themselves any favours by adding fuel to that uncertainty if they received what would no doubt be front-page headlines if they didn’t pass on a rate cut in full.”

The RBA has previously left rates steady for 15 meetings in 2002/2003 and, prior to that, for 16 meetings between a rate rise in December 1994 and a cut in July 1996.

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