The Reserve Bank Board has left official rates at 4.25 per cent. Last year the Reserve Bank cut rates at both the November and December meetings, each by 25 basis points. The next meeting is on March 7 2012.
The Reserve Bank appears to have made a strategic decision – preferring to wait on the outcome of Greek debt talks before deciding whether to cut rates further. The door remains firmly ajar to a future rate cut.
What does it all mean?
- The case for a rate cut was compelling, ranging from low domestic inflation and a high Aussie dollar to the ongoing uncertainty about the European Debt Crisis. But in the end, the Reserve Bank decided to keep its powder dry, wanting to hold on to as much ammunition as possible if the European debt crisis turned ugly.
- Monetary policy remains tight. The variable rate stands at 7.30 per cent, above the “normal rate” of 7.20 per cent – that is the average rate since 1997. Add in the fact that the Aussie dollar is stronger at US108c, and it is clear that interest rates have only one way to go – down.
- The Reserve Bank clearly maintains an easing bias – a bias to cut rates. The key phrase of the statement was: “the Board judged that the setting of monetary policy was appropriate for the moment. Should demand conditions weaken materially, the inflation outlook would provide scope for easier monetary policy.” Perhaps if the European situation deteriorates markedly, the next decision won’t be whether to cut rate by 25 basis points, but rather 50 or 75 basis points.
- Despite the inaction on rates, there are still choices for those paying off home loans and those looking to enter the housing market. The 3-year fixed home loan rate stands at 6.35 per cent, around 1 percentage point below the variable rate. If you expect banks to cut the variable rate by more than a percentage point over the next few years then you would stick with the variable rate. But for those struggling with repayments or those looking to unleash some spending power, there are clearly options available.
- Who actually benefits from today’s decision? Actually, quite a number of Australians. The latest figures indicate that around 36 per cent of Aussie families are paying off a mortgage while around 33 per cent own their homes outright and 31 per cent rent. So, arguably only a third of Australians – those paying off home loans – will be downbeat about the rates decision.
- The real losers are Aussie businesses. There is no rate cut to boost confidence and spending and no rate cut to act as an incentive to employ more staff. And the inaction on interest rates has sent the Aussie dollar soaring, eroding the competitiveness of Australian industry.
- The 2.2 million people in receipt of an age pension probably are amongst the winners from the rates decision, much preferring rates to remain high, boosting their interest income.
Interest rate decision and past cycles
- The Reserve Bank Board has left the cash rate at 4.25 per cent after previously electing to cut rates at both the November and December meetings, each by 25 basis points. The Reserve Bank had previously lifted rates seven times from October 2009 to November 2010 – a total of 1.75 percentage points, from 3.00 per cent to 4.75 per cent.
- In the last rate-cutting cycle the cash rate fell to a low of 3.00 per cent in April 2009. In the previous rate-cutting cycle the cash rate fell to 4.25 percent in December 2001. In the two previous rate-cutting cycles, the cash rate fell to lows of 4.75 per cent.
- The Reserve Bank now looks more closely at the variable housing rate to gauge how close rates are to “normal”. Currently the average bank variable housing rate stands at 7.30 per cent, slightly above the long-term average or “normal” rate of 7.20 per cent.
What are the implications of today’s decision?
- The Aussie dollar has potential to retest the 30-year high of US110 cents set in July 2011. While good news for overseas travellers and consumers buying goods on the internet, it is bad news for Aussie businesses. It was no surprise that the sharemarket slumped following today’s decision. There is no new stimulus for the economy and the higher dollar is going to make life tougher for Australian industry.
- Clearly the risk is that more businesses will have to shed staff, unable to compete with a dollar perched at multi-decade highs. The Reserve Bank may live to regret the decision to leave rates on hold.
- Lower interest rates would have served to boost the competiveness of shares and property compared with cash-based investments and bonds. But even in the absence of rate cuts, investors should have confidence to embrace the opportunities available across a range of asset classes.
- Savers are big winners from the latest rates decision. Currently banks are offering 5.40 per cent on a 90-day term deposit at a time when the cash rate stands at 4.25 per cent and the 3-year swap rate stands near 4 per cent.
- CommSec continues to expect one further rate cut from the Reserve Bank. At this stage we are factoring in a move in May, after the next inflation figures. But clearly the timing could be brought forward if the European debt crisis turns ugly.
Comparing the two most recent statements
The statement from the December meeting is on the left; the statement from today’s February 2012 meeting is on the right. Emphasis has been added to significant changes in wording in the recent statement.