The Reserve Bank of Australia has left its cash rate unchanged at 2.0 per cent for the sixth consecutive month at its November meeting.

Its decision comes after rife speculation that the official cash rate would drop to 1.75 per cent – a move that would have been welcomed by borrowers after the big four banks raised their rates last month to meet new capital reserve requirements.

Improvements in business confidence and abating volatility in financial markets were two reasons to keep rates on hold. According to RBA Governor Glenn Stevens:

“...While credit costs for some emerging market countries remain higher than a year ago, global financial conditions overall remain very accommodative. In Australia, the available information suggests that moderate expansion in the economy continues. While GDP growth has been somewhat below longer-term averages for some time, business surveys suggest a gradual improvement in conditions over the past year. This has been accompanied by somewhat stronger growth in employment and a steady rate of unemployment.”

According to the latest data from the Westpac Institute of Consumer Sentiment, confidence had climbed 4.2 percent in October. A similar report by National Australia Bank also recorded a partial recovery in business confidence.

Meanwhile, the property market cooled in October, with dwelling values rising by just 0.3 percent in Sydney, and 0.6 percent in Melbourne. Clearance rates also fell to an average of 60 percent at the end of October, from 70 to 75 percent in August and September. Housing prices in other cities remained mostly subdued.

“Both of these factors combined gave the Reserve Bank no real push to cut the cash rate,” comments Mortgage Choice chief executive John Flavell. “Moreover, given that most of the major lenders have moved out of cycle with the Reserve Bank in recent weeks, we have seen property demand start to wane ever so slightly.”

“The Reserve Bank would be pleased to see that confidence is improving and the property market is cooling without the Board having to interfere with the monetary policy setting.”

However, Stevens’ statement was clear that a rate cut might occur down the road if business confidence, consumer sentiment and economic growth performed sluggishly.

“The outlook for inflation may afford scope for further easing of policy, should that be appropriate to lend support to demand,” said Stevens.

Such dovish bias in the statement will surely increase speculation for a rate cut in December or February, points out IG market analyst, Angus Nicholson.

A cut on the official interest rate would keep the Australian dollar down, which in turn, would lift the competiveness of exporters.

The Australian dollar initially spiked to US $0.7204, before settling at around US $0.7190 following the RBA's announcement. The market also rallied behind the decision, with the ASX rebounding strongly today after the index was hurt yesterday by heavy selling in large-cap stocks.

All eyes will now be on the RBA’s monetary policy statement, to be released on Friday.

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