The Reserve Bank of Australia had only two options this month in relation to the official cash rate – to keep rates on hold at 2.75% or cut them further.
With the uncertainty of the current economic environment, the possibility of the cash rate rising was never an option. There has been a lot of discussion recently about the signs that would warrant a hold versus those that would permit a further cut.
I don’t believe that a cash rate hold this month would have been out of place if you consider the signs of improvement in the economy that are showing. For instance, capital city house prices have risen by 3.5% in the last couple of months, housing finance commitments have been improving, and consumer confidence remains steady.
However, the encouraging signs in the property market and consumer sentiment don’t appear to have been enough for the Reserve Bank to confidently rest on its laurels. The decision to cut rates again, in an attempt to further stimulate the economy, would have been made by also taking other economic factors into consideration.
One factor that would have likely been a catalyst for a rate cut is shaky business confidence. There is concern that unemployment may rise if the gap left by the peak in mining investment is not filled by an increase in business investment in the non-mining sectors, including the property market.