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Reserve Bank holds cash rate at 1.5%

Reserve Bank holds cash rate at 1.5%

The RBA expects the country's economic growth to slow by the end of the year before improving next year, as its board kept the cash rate on hold at its last meeting for 2016.

The Reserve Bank of Australia (RBA) left the official cash rate unchanged at a record low of 1.5% at its December board meeting, noting an improving outlook for inflation around the world. 

The decision was expected by financial markets, with the RBA Rate Indicator pricing in a 98% chance of no rate reduction before today's announcement. 

In a statement released today after the meeting, RBA governor Philip Lowe said Australia's national income is improving as a result of higher commodity prices over this year, supported by stronger demand amid supply cuts in some countries. 

However, the nation's economic expansion may slow by the end of the year before rising in 2017, he said.

"Some slowing in the year-end growth rate is likely, before it picks up again. Further increases in exports of resources are expected as completed projects come on line," he said.

The Australian dollar fell marginally to 74.53 US cents at 2:35pm Sydney time following the rate call, but rebounded to 74.64 US cents at 3:15pm.

The central bank board won't meet again to decide on its monetary policy until 7 February 2017.

Chinese economy

Dr Lowe reiterated that the economic conditions in China, Australia's largest trading partner, have steadied due to more infrastructure and property construction, although risks to growth remain in the medium term.

"Inflation remains below most central banks' targets, although headline inflation rates have increased recently," said Dr Lowe. "Globally, the outlook for inflation is more balanced than it has been for some time."

While the housing market has strengthened overall, Dr Lowe noted the price gaps between different parts of the country and slightly higher housing credit.

"In some markets, prices are rising briskly, while in others they are declining," he said.

CommSec chief economist Craig James forecast that the RBA would refrain from cutting interest rates "for a few more months" in view of recent developments around the world.

"Global politics has become less predictable; oil prices are lifting in response to a new production agreement; longer-term bond yields have spiked higher; and there is a new President in the White House.

"So the Reserve Bank needs time to determine how the changes affect the Australian economy, and therefore interest rates settings," said James.

This article is intended to provide general information of an educational nature only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice. Past performance is not an indication of future performance.