The RBA keeps interest rates on hold, as it waits to see the federal government's cards

The RBA is waiting to peek at the federal government’s cards.(Steve Russell, Toronto Star via Getty Images)
  • The official interest rate has been left at 0.25% on Tuesday by the Reserve Bank of Australia (RBA).
  • It comes amid speculation by economists that the central bank is looking to cut to 0.10%.
  • The RBA however appears to be content waiting to see what the Morrison government hands down in its federal budget on Tuesday evening.
  • Visit Business Insider Australia’s homepage for more stories.

If the central bank is feeling the pressure, it’s not showing it.

The Reserve Bank of Australia (RBA) has held the line on Tuesday, defying speculation from some economists it was to cut the official cash rate to 0.10%.

Instead, the board concluded its monthly meeting with its poker face firmly intact.

“Labour market conditions have improved somewhat over the past few months and the unemployment rate is likely to peak at a lower rate than earlier expected. Even so, unemployment and underemployment are likely to remain high for an extended period. Wage and inflation pressures remain very subdued,” RBA Governor Philip Lowe said.

Interest rates remain stuck at 0.25% ahead of the federal budget to be handed down at 7:30 PM on Tuesday evening.

“Over the past six months, the Australian economy has been supported by a substantial easing of fiscal policy. Public sector balance sheets in Australia are in good shape, which allows for continued support, with the Australian Government budget to be announced this evening,” Lowe said.

“Both fiscal and monetary support will be required for some time given the outlook for the economy and the prospect of high unemployment.”

While some economists had suggested the RBA would cut in October, others anticipate the ever-cautious Lowe would wait to see what fiscal stimulus the federal government was willing to provide.

It has, after all, run almost entirely out of ammunition with almost no room to take interest rates lower without taking them negative — territory the RBA hasn’t ruled out entirely. It revealed on Tuesday that to date it has purchased $63 billion worth of government securities.

Lowe has been lobbying the federal government to increase spending and stimulate the economy for months.

“RBA Governor – Phillip Lowe – has repeatedly called on state and territory governments to step up to the plate in terms of spending and investment, to assist in generating the economic recovery Australia requires,” CreditorWatch chief economist Harley Dale said.

“In due course, the RBA will likely reduce the OCR to 0.10 per cent, but today wasn’t the day.”

Ahead of the budget, Lowe may be pleased then to see then that stage two tax cuts are expected to hand most Australian workers $1,000 or more over the course of the next 12 months.

Still, the entire board will be laser-focused on the direction the Treasurer takes from here on in.

“Although credit is ultra-cheap by historical standards, businesses, in particular, are very reluctant to borrow to invest given the uncertain outlook and weakness in demand,” Sarah Hunter, chief economist at BIS Oxford Economics, said.

“Government spending, tax cuts and other supports will be much more effective — as has already been seen in the success of the JobKeeper program, which has supported household income and spending over the last six month — and the announcements in tonight’s budget will have much more of an impact on activity levels over the next 6-12 months.”

If government support continues to be wound back with few stimulus measures to replace it, then the RBA may have no other choice but to cut next month.

Ball is in Josh Frydenberg’s court.

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