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Interest rates on hold

Reserve Bank of Australia (RBA) governor, Glenn Stevens, has indicated that interest rates will remain on hold until the middle of 2013 and perhaps longer.

Speaking before a federal parliamentary economics committee in Canberra this morning, Mr Stevens said that economic and financial conditions over the past six months had improved. He said that the possible disintegration of the euro has abated and the United States has continued its gradual recovery, with headwinds subsiding.

He added that a slowdown in China’s economy had come to an end, and while it wouldn’t grow at the “hectic pace” of growth seen over the past decade, it will still grow at a decent clip over the medium-term.

Despite continual commentary that households are very cautious, actual measures of confidence have been in an upward trend since the middle of last year. Mr Stevens expects consumer demand to rise roughly in line with income growth, and housing investment should strengthen, given several supportive factors, including low interest rates, housing prices are tending to rise, gross rental yields have increased and population growth remains strong.

Mr Stevens said that the six cuts to the official cash rate since November 2011 for a total of 175 basis points was having an effect on the economy. Housing prices have risen since last May and share prices have risen significantly. Returns on safe assets, such as term deposits and bonds have fallen, prompting savers to consider shifting their portfolios towards other assets.

Foolish takeaway

With no official interest rate cuts on the horizon, it will be interesting to see if the big four, ANZ Bank (ASX: ANZ), Commonwealth Bank (ASX: CBA), National Australian Bank (ASX: NAB) and Westpac Banking Corporation (ASX: WBC) cut their mortgage rates out-of-cycle. Wholesale funding costs have halved and it seems only high deposit rates stand in the way of lower mortgage rates.

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More reading

The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.  This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned.

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