Many expected a 0.25% raise last Tuesday, but it didn't happen, why is that so?

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2 Answers

Good question, and it's good to know you are starting to think from now! Because in the exam and throughout your SACs teachers and examiners start having funny tingling feelings in their heart when you present economic rational.

The RBA has left interest rates on hold, because remember the outcry when they raised them for like 3-4 times in a row? And Australia, from what I remember was the first developed nation to raise interest rates following the Global Financial Crisis? Well the interest rate rises began to dampen consumer and business confidence. In other words the RBA kicked in too rapidly.

Yes, the RBA had a reason to raise interest rates because Australia was growing fine and much better placed than the USA and Europe. And as you should know the RBA increases/decreases interest rates pre-emptively that is, before inflation begins to rise (i.e. they sort of predict the future economic conditions, which for Australia is going to be rapid economic growth again, more and more jobs= inflation).

But the RBA seemed to have under estimated the fragility of consumer sentiment/confidence. People were still reluctant to spend, especially since unemployment is still relatively above the 4-5% target, and now that the stimulus payments by the Government have worn off.

In addition, high levels of debt following Christmas have caused people to now pay the price by reducing their already low spending levels in order to pay off the debt accumlated in the festive season.

In the past few days as well the level of fiscal debt in most major economies  (USA is in the trillions) has begun to impact the sharemarket causing its value to fall.

What the other significant reason was, is as the RBA stated in it's statement

  the cash rate was raised by 25 basis points at each of the October, November and December meetings to 3.75 per cent. Banks increased interest rates on loans by more than this, with most loan rates increasing by close to a percentage point over this period. While interest rates on loans remain below average, these increases have materially reduced the amount of monetary stimulus to the economy.

What this means is that, remember the last 3-4 RBA meetings where the cash rate was increased? Well bank continually raised THEIR interest rates more than what the RBA did, e.g. the RBA increased the cash rate by 0.25, banks did it by 0.75, meaning consumers were paying MORE on interest than what the RBA wanted (remember the RBA uses monetary policy aka interest rates to affect our spending). As a result of the excess costs passed onto consumers, the RBA was able to afford giving us breathing space i.e. not raising rates.


  With inflation moderating as expected, interest rates no longer at exceptionally low levels, and relatively little information available as to the impact of the recent increases, the Board judged it appropriate to hold the cash rate steady for the time being.

That's an interesting point. You should know that interest rates take around 18-24 months to have the desired impact on Aggregate Demand.

I hope this made sense! Any more questions post/ask away!!

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I couldn't agree more with you asa.hoshi.

The RBA did not raise the rates as confidence figures still showed signs of weak consumer spending thus resulting the board to hold the cash rate for the time being to further 'test' the economy's health.

There's a great video of Ross Gittins explaining why the Board kept rates on hold, but unfortunately I cannot find it. Search around The Age :).

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