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Australia holds rates as speculation mounts for cuts

The Reserve Bank of Australia (RBA) on Tuesday kept interest rates unchanged, as expected, even as speculation mounts that borrowing rates, already at record lows, could head further south.

The central bank kept rates at 2.5 percent, and maintained its rhetoric for a period of stability for rates.

"I think the RBA has concluded that they've cut interest rates enough. Rates are not a constraint on the economy growing. Yes, the Australian dollar is still too high but that's a function of other things. In the meantime, it's just a matter of waiting for animal spirits to recover in Australia and for growth to pick up," said Shane Oliver, head of investment strategy & chief economist at AMP Capital Investors.

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The decision comes as the so-called "lucky country" appears to be losing its Midas touch, as the economy contends with weak growth, slowing inflation and a rising jobless rate, adding to the argument that intervention from the central bank is coming.

On Monday, Deutsche Bank released a report titled "Australia: Change of Call," which predicts the RBA will cut rates by 50 basis points (bps) to 2 percent next year, a shift from its earlier stance of no change.

"After forecasting in early November 2013 that the cash rate would remain at 2.50 percent all through 2014, 2015 and H1-2016, we have in recent months been highlighting the risk of lower interest rates in 2015," Adam Boyton of Deutsche wrote.

The Reserve Bank of Australia headquarters
Getty Images
The Reserve Bank of Australia headquarters

"DB now expects the RBA to cut 25 basis points in late Q2 2015, with a further 25 basis points easing in late Q3 / early Q4 2015," the report added.

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The robust housing sector has prevented the bank from forecasting rate cuts in the past, who now says there are signs the property sector could be cooling, with possible measures from authorities dousing sentiment further.

"Nascent signs of moderation in house price growth and the likelihood of some 'macro-pru-lite' to cool the investor segment of the housing market, combined with our forecast for the unemployment rate to move higher through 2015 and on-going declines in commodity prices, have led us to change our view on the cash rate," Deutsche said.

Australia has avoided a recession for the past 25 years, but a recent report by Morgan Stanley says the economy could be well on the brink of a contraction unless authorities implement more rate cuts and end the government's tight spending policy.

The country is due to release third quarter gross domestic product growth figures on Wednesday, which is like to show the economy grew 3.1 percent from a year earlier according to a Reuters forecast, unchanged from the second quarter.

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IG's Evan Lucas says he would be "surprised and slightly concerned" if the RBA doesn't change its stance on monetary policy soon.

"With bear markets in iron ore and oil, wage growth flat lining, corporate profits falling and confidence sliding there's a sustained pressure on living standards. This pressure is combined with housing data which shows very clearly the heat from the beginning of the year is coming out," he said in a note before the RBA decision.