RBA keeps rates on hold

Central bank happy with economic growth and AUD/USD exchange rate

The Reserve Bank of Australia (RBA) has kept the official cash rate at record lows of 2.5% at its board meeting today.

Some sectors of the economy are still benefitting from a series of rate cuts since November 2011, says the bank, and that is likely to continue. For once, economists got their predictions right, with all 33 economists surveyed by Bloomberg predicting that the RBA would leave rates on hold.

Australian Industry Group’s Performance of Manufacturing gauge surged 5.3 points to 51.7 points, snapping a 27-month losing streak. A reading above 50 indicates expansion. Also out today, retail sales gained 0.4% in July according to the Australian Bureau of Statistics (ABS), beating the 0.3% expected by the market.

Both sets of data suggest sectors of the economy are slowly recovering. Rising house prices, and a slight uptick in credit growth are also pointers to rate cuts gaining traction in the economy as the RBA wants.

Keeping rates on hold suggests the RBA is comfortable with the Australian dollar trading at around current levels of 93 US cents, but the central bank could face a problem if the exchange rate goes back above parity.

Retailers such as JB Hi-Fi (ASX: JBH), Harvey Norman Holdings (ASX: HVN) certainly want another rate cut to encourage consumers to go out and spend. Rising house prices should also increase people’s confidence to pull out their wallets. Department store retailers including David Jones (ASX: DJS) and Myer Holdings (ASX: MYR) saw sales surge 6.4% in August, recovering much of the 7.9% fall in July.

Foolish takeaway

Two thirds of economists are still predicting no change to the official cash rate in November, although three of the big four banks’ economists say there will be a cut next month, according to Bloomberg. But if house prices continue to skyrocket, the next rate move could be upwards.

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Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned.

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