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Rates on hold for Christmas

Rates on hold for Christmas

The Reserve Bank has left official interests on hold at its last meeting of the year, giving no hint it is in the mood to cut them further.

Reserve Bank governor Glenn Stevens confirmed official rates would sit at 2.5 per cent until at least February next year when the board next sits.

Rates have been steady since they were last cut in August 2013.

Mr Stevens said monetary policy was accommodative and should provide support to demand and help growth strengthen over time.

“Interest rates are very low and have continued to edge lower over the past year or so as competition to lend has increased,” he said.

“Investors continue to look for higher returns in response to low rates on safe instruments. Credit growth is moderate overall, but with a further pick-up in recent months in lending to investors in housing assets. Dwelling prices have continued to rise.”

Mr Stevens said while the Australian dollar had fallen recently it still seemed high relative to the drop in commodity prices.

“The Australian dollar remains above most estimates of its fundamental value, particularly given the significant declines in key commodity prices in recent months,” he said.

“A lower exchange rate is likely to be needed to achieve balanced growth in the economy.”

The decision followed a call by economists at Deutsche Bank that the Reserve would have to cut official rates by half a percentage point over the coming 12 months.

Adam Boyton said a slowdown in house price growth, on top of other issues across the economy, meant the Reserve would have to reduce the official cash rate.

It would also put downward pressure on the Australian dollar.

“Placing additional ‘income’ in the hands of consumers who are currently seeing zero real wages growth and suffering fiscal drag should lift both sentiment and consumption,” he said.

“It should also prolong an increase in housing construction activity. In a ‘top-down’ sense, lowering rates when the Fed might be increasing them should ‘help’ the Australian dollar catch-up to the declines in commodity prices.”