Reserve Bank holds interest rate at 4.25%


THE Reserve Bank today kept the interest rate on hold for February, defying expectations that a third consecutive cut would be ordered.

At its first meeting of 2012, Australia’s central bank board voted in Sydney to keep the official cash rate on hold at 4.25 per cent.

Financial markets had judged there was an 80 per cent prospect of a 25-basis-point cut.

The RBA decision comes despite ongoing volatility in the global economy and international financial markets as a result of the European sovereign debt crisis.

The likelihood is also growing in Australia that the unemployment rate will start to climb from its current rate of 5.2 per cent.

The major Australian banks are all shedding jobs; Macquarie Group revealed today it had cut at least 1000 jobs in the past few months. A subdued retailing sector is also forecast to begin widespread job cutting after a 0.1 per cent fall in retail sales for December 2011.

In a statement, Reserve Bank governor Glenn Stevens said inflation and economic growth was close to average after the two interest rate cuts ordered late last year.

“The board noted that interest rates have declined to be close to their medium term average as a result of the actions at the board’s previous two meetings,” Mr Stevens said.

“With growth expected to be close to trend and inflation close to target the budget judged that the setting of monetary policy was appropriate for the moment. Should demand conditions weaken materially the inflation outlook would provide scope for easier monetary policy. The board will continue to monitor information on economic and financial conditions and adjust the cash rate as necessary to foster sustainable growth.”

The decision prompted the Australian dollar to soar by 1 US cent to $US1.0789, the highest point since August. A cut would have weakened the US dollar given that Australia’s interest rate differential with the rest of the world would have declined.

However, Australian equities turned to negative territory on the RBA news.

The RBA’s move ramps up the pressure on the retail banks which are forecast to change their standard variable rates. It was expected the top four banks would not pass on all the likely cut that was expected to be ordered today. The ANZ could be the first to move with its independent review of lending rates scheduled for Friday.

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