Rates kept on hold on Cup day but low inflation keeps the door open for more cuts

The Reserve Bank has resisted the temptation to cut interest rates on Melbourne Cup day but has left the door open for more cuts in the future.

With the new Turnbull Government has come a growing sense of confidence in the economy as its prospects for improvement strengthen. The RBA says it has left rates on hold as a result.

The RBA did leave the possibility of further rate cuts below the record two per cent open due to predictions of low inflation for the coming months. 

The Australian dollar got a boost from the decision, trading for 72 US cents by the end of Melbourne Cup day. 

“At today’s meeting, the board judged that the prospects for an improvement in economic conditions had firmed a little over recent months and that leaving the cash rate unchanged was appropriate at this meeting,” Reserve Bank governor Glenn Stevens said.

“Members also observed that the outlook for inflation may afford scope for further easing of policy, should that be appropriate to lend support to demand.”

Back to the inflation outlook, most economists were starting to tip rates to remain on hold after the September quarter Consumer Price Index showed inflation was at 1.5 per cent and below the RBA’s expectations. 

The recent interest rate rises from the big four banks for mortgage loans certainly would have been one in many factors in the RBA’s decision.

JP Morgan senior economist Ben Jarman told ABC News statements by the RBA showed they were comfortable with the rate hikes from the big four. 

“Some changes in lending rates at the margin will obviously act to slow the housing market, but they still put this in the big picture and say that overall conditions are pretty accommodative,” Mr Jarman said.

“So after four years of cash rate cuts, it’s hard to look at what the banks have done recently and say that it really tightens conditions aggressively.” 

The RBA is now expected to revise its inflation forecasts in its Statement on Monetary Policy later this week.


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