Australian borrowers will have to wait at least another month for more interest rate relief after the Reserve Bank surprised everyone by leaving its key rate unchanged. The Reserve Bank yesterday kept its cash rate at 4.25 per cent, defying expectations of a third rate cut in a row.
With the cash rate sitting at 4.25 per cent it is still in a position other western central banks can only envy, with considerable room to lower rates to stimulate growth should it be necessary.
This pause is then a genuine pause, not the end of the rate-cut program.
The Reserve needs Europe’s recovery to continue, and it needs Australia’s employment situation to stabilise, even as the Australian dollar stays well above parity with the US dollar. This will involve not so much a lowering of the jobless rate, but an increase in employment, which was flat in 2011.
If Europe deteriorates again or job growth continues to flat-line, rate cuts will resume again. And, as the Reserve notes, the inflation outlook gives it room to cut them aggressively if necessary.