RBA’s decision to leave rates on hold good news for retailers – but how long can it last?

Economists have described the Reserve Bank of Australia as being “comfortable” with its current interest rates setting, suggesting rates could remain on hold well into the second half of the year.

In what is being seen as a big win for retailers, the RBA yesterday left rates on hold at 4.75% for the third consecutive meeting, saying its “mildly restrictive” rates setting remains appropriate for current economic conditions.

Indeed, the RBA seems relaxed about what many see as inflationary pressures building in the market.

In his statement released after the meeting, Governor Glenn Stevens said wage growth has simply “returned to rates seen prior to the downturn” and said that “reports of skills shortages remain confined, at this point, to the resources and related sectors”.

The bank again confirmed it would look past the inflationary pressures created by the recent natural disasters in Queensland, businesses and households are still looking to pay off debt rather than borrow more.

“Asset values have generally been little changed over recent months and overall credit growth remains quite subdued, notwithstanding evidence of some greater willingness to lend. Business balance sheets generally are being strengthened, and the run-up in household leverage has abated,” Stevens said.

Even the longer-term outlook for inflation is pretty good, with the bank tipping inflation will remain within its 2-3% range for the rest of the year.

Which raises the question: When will the RBA need to move again?

CommSec’s Craig James says that’s the $64 question.

“The Reserve Bank is clearly in ‘wait-and-see’ mode on interest rates,” he says.

“A sustained period of interest rate stability should boost consumer and business confidence levels and eventually get people to start spending again. This is clearly great news for all concerned, allowing Aussies to get on with life.”

James says the a period of stable rates decision will be good news for retailers and “consumer-facing” businesses who should find their customers are more willing to open their wallets.

Australian Retailers Association executive director Russell Zimmerman welcomed the RBA decision, but says retailers will be looking for a much longer reprieve.

“Retailers are calling on the RBA to continue their steady hand and keep rates on hold until at least the third quarter while both consumers and retailers get back on their feet,” he said in a statement.

There’s good reason for that, as the back half of the year looks like it will throw up bad news for struggling shopkeepers.

“Even though rates are on hold, the threat of higher rates in the later part of 2011 together with lofty utility charges and higher petrol prices will ensure that consumer conservatism continues well into the second half of the year,” Craig James says.

And while James expects the RBA to remain on hold until late 2011, he says business owners and households need to be prepared.

“Simply, if you factor in higher rates over the next year then you have the best chance of maintaining your current lifestyle without major disruption.”