Experts Believe RBA Will Retain 3.25% Cash Rate

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By Vittorio Hernandez | November 6, 2012 9:38 AM EST

Experts believe that the Reserve Bank of Australia (RBA) will retain the current 3.25 per cent overnight cash rate when the central bank's monetary committee meets on Melbourne Cup Day on Tuesday, Nov 6.

This, despite six members of a nine-member shadow RBA board of News Limited believing a rate cut is needed, while two share the experts' sentiment that it should be held and one even is in favour of a rate increase.

Economic data that came out Monday indicated a rate reduction is warranted.

If the experts' opinion holds, it would be the first time in six years that RBA Governor Glenn Stevens will not deliver a Cup Day rate change. Since he assumed leadership of the Australian central bank, Mr Stevens had made two Cup Day rate cuts, the first in 2008 and the second in 2011.

They pointed out that since Mr Stevens made a surprise rate cut in October, he has the luxury of holding off another rate cut until stronger local or global conditions require one.

Paul Bloxham, chief economist at HSBC and shadow RBA board member, said he opted for a rate cut to ensure a smooth rebalancing from a mining-driven growth to a consumer- and housing-driven growth. Another shadow board member and Bank of America Merrill Lynch chief economist Saul Eslake agreed with Mr Bloxham that the RBA should reduce the key lending rate to ensure sectors of the Australian economy that are sensitive to interest rate movements are well placed when the investment phase of the resources boom starts to wind down.

Despite the Monday report of the falling job ads, analysts agree that the RBA monetary policy decisions are based on conditions in the past six months, not just a day prior.

"The RBA should cut the cash rate . . . it has just six months to create momentum in the economy sufficient to offset falling mining investment. There are few green shoots in retail, and stabilised housing prices, but beyond that not enough is going on. With an overvalued currency and a government hell-bent on surplus, lower interest rates are the only lever left to pull," wrote Macro Investor editor David Llewellyn-Smith in The Sydney Morning Herald.

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