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FIVE at FIVE AU: RBA keeps interest rates on hold as ASX dips

Published 06/02/2024, 04:02 pm
Updated 06/02/2024, 04:30 pm
© Reuters.  FIVE at FIVE AU: RBA keeps interest rates on hold as ASX dips
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There will be no 14th cash rate hike for Australia this month with the Reserve Bank of Australia keeping the rate at 4.35%.

Meanwhile, the ASX dropped today, hurt mostly by tech stocks.

The S&P/ASX200 dropped 47.00 points or 0.62% to 7,578.90. The index has lost 0.28% for the last five days, but is virtually unchanged over the last year to date.

Bottom-performing stocks in this index are West African Resources Ltd (ASX:WAF) and Cochlear Ltd, down 11.17% and 6.74% respectively.

Looking at the sectors, only Energy was in the green making 0.55%. The worst performed was Information Technology followed by Materials, down 1.70% and 1.23% respectively.

On the small cap front, the S&P/ASX Small Ordinaries dropped 0.61% to 2,930.20 today and is up just 0.06% over the past five trading days.

Rates on hold

Homeowners sighed in relief as the RBA held interest rates steady. It set the tone for the year ahead while giving clues as to when struggling households can expect cuts.

The board meeting marked two historic milestones: it was held over two days and is the first of only eight to be held this year as the new regularity kicks in.

The decision was made on the back of weak economic data, including employment and lower retail and inflation reports.

The markets are now pricing in 25-point basis cuts in August and November.

However, governor Michelle Bullock used a cautious tone.

“While there are encouraging signs, the economic outlook is uncertain and the board remains highly attentive to inflation risks,” the board said. “The board needs to be confident that inflation is moving sustainably towards the target range.

“While recent data indicate that inflation is easing, it remains high. The board expects that it will be some time yet before inflation is sustainably in the target range.”

The RBA believes its inflation target of between 2% and 3% will be met in 2025.

“The path of interest rates that will best ensure that inflation returns to target in a reasonable timeframe will depend upon the data and the evolving assessment of risks, and a further increase in interest rates cannot be ruled out,” the statement read.

"The board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that outcome.”

CreditorWatch chief economist Anneke Thompson said, “In response to a wealth of data pointing to both slowing inflation and a slowing economy, the Reserve Bank board took the decision today to leave the cash rate on hold at 4.35%.

"At 4.1%, the December inflation figure is still too high for the board to consider a rate cut today, however, all indicators point to inflation falling faster than last year’s forecasts, and this may well result in a decrease to the cash rate some time in the middle of the year, rather than the latter half.

"Inflation is also falling rapidly in major overseas economies and central banks in the USA, UK and Europe are likely to consider cuts to their interest rates over the next few months.

“The unemployment rate will continue to play a key role in the board’s decision-making process.

"Thus far, strong employment and a low unemployment rate have given the board confidence that their monetary policy settings are not adversely impacting the jobs market. However, monthly hours worked by Australians peaked in June 2023 and have been on a downward trend since.

"Businesses are also reporting capacity utilisation edging downwards, which is a good forward leading indicator of higher unemployment.

"Should the unemployment rate start increasing at a more rapid pace, the RBA board may choose to cut the cash rate sooner rather than later, as preserving the employment gains achieved since the pandemic is one of their key goals.

“CreditorWatch data indicates that business conditions are going to get harder before they get easier, highlighting the lag effect of monetary policy tightening. We expect the insolvency rate to rapidly increase from 4.2% as at November 2023, to 5.8% by November 2024.”

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