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imageRBA governor Glenn Stevens said moderate expansion is continuing in the Australian economy.AAP Image/Lukas Coch

The Reserve Bank of Australia has decided to leave the official cash rate unchanged at a record low of 2%, but said there was scope for a rate cut down the line.

In a statement on the RBA website, governor Glenn Stevens said:

At today’s meeting the Board judged that the prospects for an improvement in economic conditions had firmed a little over recent months and that leaving the cash rate unchanged was appropriate at this meeting. Members also observed that the outlook for inflation may afford scope for further easing of policy, should that be appropriate to lend support to demand.

The US Federal Reserve is expected to start increasing its policy rate in the period ahead, the statement said.

Recent attention has focused on the widening gap between the official cash rate and the mortgage rates set by the major lenders.

All of the big four banks have raised their variable home loan rates, after the introduction of tougher new capital requirements designed to act as a buffer in case of financial crisis. The new prudential regulations followed the Murray report into the financial system.

Australia’s estimated seasonally adjusted unemployment rate for September 2015 sits at 6.2%. The RBA said today today that there had been “stronger growth in employment and a steady rate of unemployment.”

The RBA said inflation is low and should remain so, forecasting it to be “consistent with the target over the next one to two years, but a little lower than earlier expected.”

We asked experts to respond to the RBA decision.

Timo Henckel, Research Associate, Centre for Applied Macroeconomic Analysis, Australian National University:

This is the right decision. There are signs of weakness in the economy and financial conditions have changed, with the four big banks raising their home loan rates and global financial markets remaining nervous, but there’s not enough there to lower rates further. They are already very low by historical standards.

Inflation is low, that’s true – but a number of the CAMA Shadow Board members are still concerned about easy money and the danger of fuelling asset prices bubbles. I think several Shadow board members would not be unhappy about the banks recently increasing the mortgage rate.

Moreover, this year has witnessed a dramatic fall in energy prices, which would have exerted downward pressure on prices, albeit only temporarily. At this stage it is not clear to what extent lower inflation is supply-side or demand-side driven.

Monetary policy has been expansionary for a long time and this is helping to rebalance the Australian economy, away from the resource sector to manufacturing and the service sector. Whatever slack is left in the system is probably best left to other policy measures, like fiscal and micro-economic policy.

Today’s decision will probably not affect the gap between the official cash rate and the big four rates. When the banks lifted their mortgage rates, they presumably did not do this in anticipation of the RBA changing policy. It would have been interesting had the RBA dropped rates – would the banks have reversed their recent rate increase? Probably not. I cannot judge whether the additional regulatory measures imposed on the banks exactly justify the increase in their home loan rates. No doubt these measures were also a welcome excuse for the banks to squeeze a little but of extra profit margin for their shareholders.

Recent events have confirmed that the RBA is not the only institution assigned with macroprudential objectives. There’s been a vigorous debate, both in policy and academic circles, about whether central banks should be concerned with asset price inflation and excessive credit growth and whether they should use interest rates to prevent asset price price bubbles from becoming too large. It is reassuring to see the Australian Prudential Regulation Authority taking its role seriously and assuming responsibility.

Guay Lim, Professorial Fellow, University of Melbourne

I support and agree with the no-change, wait-and-see decision. I have concerns that further cuts will fuel asset prices with little effect on real spending.

In coming weeks, we will probably better understand what’s happening with fiscal policy and what’s happening with the US rate.

Timo Henckel receives funding from the Centre for International Finance and Regulation (CIFR).

Guay Lim has received funding from the Australian Research Council.

Authors: The Conversation Contributor

Read more http://theconversation.com/rba-leaves-cash-rate-unchanged-at-record-low-2-experts-respond-50124

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