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RBA to keep rates on hold

Economists widely expect the Reserve Bank to keep interest rates on hold when it holds its monthly board meeting tomorrow.

Despite repeated warnings from several members of the Central Bank over the strength of the Australian dollar, it’s unlikely that the RBA will cut the official cash rate just to lower the dollar.

Further cuts to the already low 2.5% official cash rate could have unintended consequences, particularly when it comes to the property sector. House prices have risen across Australia’s capital cities by around 8% over the past twelve months according to RP Data-Rismark. Fears have started to rise that the market could be entering a bubble phase, but that has been repeatedly hosed down by the RBA.

Governor Glenn Stephens says part of the most recent rise will offset some of the falls experienced in the past few years.

Other data that the RBA will be looking at is inflation and other sectors of the economy such as manufacturing and services. In the year to November, inflation rose 2.4%, still well within the RBA’s target zone of between 2-3%. Manufacturing activity still appears to be struggling, with the Australian Performance of Manufacturing slipping 5.4 points to 47.7 in November, after expanding for two months.

Most economists expect the RBA to keep rates on hold, with predictions that the next rate move could be up. According to Michelle Hutchison, spokesperson for comparison website finder.com.au, seven out of eight economists are betting on the rate rise coming as far out as 2015.

Ms Hutchison says fixed rates are moving sporadically with some up, others down. Fixed rates are usually an indicator of where the banks think rates are headed. At this stage it appears ANZ Bank (ASX: ANZ), Commonwealth Bank (ASX: CBA), National Australia Bank (ASX: NAB) and Westpac Banking Corporation (ASX: WBC) expect rates to stay low for some time.

Foolish takeaway

With the market pricing in a 6% chance of a rate cut on Tuesday, we won’t be at all surprised if the RBA keeps rates on hold – which means no Christmas bonus for Australia’s mortgage borrowers.

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Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

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