• In addition the Board highlighted recent inflation data and global developments: “prices data slightly higher than expected and recent information on the world economy slightly more positive.” The next Board meeting is on December 4 2012.
• Is the end game being played out for interest rates? If the global economy continues to heal and the Australian economy lifts, then further rate cuts won’t be necessary. And that is a good thing. But we are still pencilling in the risk of a rate cut in early 2013.

What does it all mean?

• The $64 question is where we go from here. Interest rates are already low, but could still go lower. But rate cuts alone may be insufficient to provide the stimulus necessary to keep economy growing at a trend pace and prevent the unemployment rate from rising. Confidence and expectations will be all-important on whether further rate cuts are required.
• It raises the contentious issue of whether the Reserve Bank needs to give borrowers some assurance on rates. If borrowers believe that rates will stay low for just a short time before moving higher again, then they will be reluctant to increase borrowing or spending levels. In New Zealand the Reserve Bank provides views on the direction of 90 day interest rates. And in the US, the Federal Reserve has committed to keep rates low until mid-2015. While the same length of commitment is clearly not required in Australia, the issue is whether some guidance on rates is useful or even necessary.
• These are clearly special times. Rates have been cut dramatically but there has only been limited response in spending and borrowing levels. The missing ingredient is confidence. Add in the fact that the Aussie dollar remains high, despite an easing in commodity prices, and the Reserve Bank may be forced to consider different strategies.
• Overall it is clear that the Australian economy is marking time. The job market is softening while construction, manufacturing and services sectors are contracting, according to the latest activity gauges. Consumer spending is variable with traditional ‘bricks and mortar’ retail sectors doing it tough through a combination of consumer caution and a high Aussie dollar driving purchases offshore.
• CommSec is pencilling in another rate cut. While the global economy is looking more stable, there are still plenty of events to be played out such as the Chinese recovery and US “fiscal cliff.”

Interest rate decision and past cycles

• The Reserve Bank Board has left the cash rate at 3.25 per cent. The previous rate cuts were in October (25 basis points), June (25 basis points), May (50 basis points) and November and December 2011 (each by 25 basis points). Prior to those moves the Reserve Bank had previously lifted rates seven times from October 2009 to November 2010 – a total of 1.75 percentage points, from 3.00 per cent to 4.75 per cent.
• In the last rate-cutting cycle the cash rate fell to a low of 3.00 per cent in April 2009. In the previous rate-cutting cycle the cash rate fell to 4.25 per cent in December 2001. In the two previous rate-cutting cycles, the cash rate fell to lows of 4.75 per cent.
• The Reserve Bank now looks more closely at the variable housing rate to gauge how close rates are to “normal”. Currently the variable housing rates of major banks are around 6.65 per cent, below the long-term average or “normal” rate of 7.20 per cent. The RBA notes that “Interest rates for borrowers have declined to be clearly below their medium-term averages and savers are facing increased incentives to look for assets with higher returns.” In other words stimulus is modest and conservatism is starting to be eroded.

What are the implications of today’s decision?

• Borrowers may be disappointed by the decision to leave rates on hold, but the growing army of savers will be relieved. Still, at some point savers will need to start looking at the alternatives to cash-based investments, and that may prove positive if more funds are channelled through share and property markets. The Reserve Bank believes this is happening, but we see no firm evidence of savers moving away from term deposits. Businesses will also be disappointed as the decision to leave rates on hold will serve to keep the dollar at high levels.
• Rates may have been left on hold today, but that is by no means the end of the story. The Reserve Bank will continue to lean in favour of rate cuts, and hopefully we will be provided with more guidance on the subject in Friday’s quarterly monetary policy statement.
• Is this the final rate cut? Hopefully, yes – that would indicate a better global and domestic economic climate. But we aren’t totally convinced, and are pencilling in the risk of a 25 basis point cut early in 2013. The seeds of an economic upturn have been planted, now we have to wait for green shoots to appear. But it all depends on the confidence levels of businesses and consumers.
• The absence of a rate cut today will ensure that the Aussie dollar stays high. In fact the Aussie leapt over half a cent after the decision. The Reserve Bank has a problem. If the Aussie dollar continues to soar, but the carbon tax leads to a lift in inflationary pressures, then the question is which way will the Reserve Bank jump?
• Businesses will have to factor in an Aussie dollar around US103-105 cents. Exporters, retailers and manufacturers will remain under pressure.

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