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 April 3 2012.
The Reserve Bank acknowledges the pain occurring in some sections of the community with “structural change” mentioned twice in the statement.
What does it all mean?
The Reserve Bank Governor is in that “happy place”. Inflation is in the middle of the 2-3 per cent target band; economic growth is expected to be close to “trend” over the next year; and the European debt crisis is a “watching brief” rather than a major issue. In short, there are no pressing reasons to cut interest rates and there are no pressing reasons to lift rates. And the Reserve Bank would require a significant shove to move from its current stance.
Still, if rates are likely to move anywhere in coming months, the risk is clearly on the downside. Manufacturing, services and construction sectors are contracting; the high Aussie dollar is still troubling businesses; inflation is well contained; and interest rate settings are on the high side of “normal”. We have pencilled in a rate cut in May – after the next batch of inflation figures in late April.
The Reserve Bank has paid lip service to the pain being felt in many parts of Australia, noting “considerable structural change.” Presumably the Bank believes the best it can do in the current environment is leave rates steady and let the forces of change work their magic.
Some economists believe that there is no ‘two speed’ economy, or if there is, the differences between industries and regions aren’t much different than the past. Most would disagree. Domestic-focussed businesses continue to struggle – and not just in areas like manufacturing, construction and tourism. The Australian services sector continues to go backwards and has underperformed its US counterpart for the past two years.
Looking at a chart of the services indexes of the two countries, an observer would rightly ask which economy is supposed to be struggling.
The Reserve Bank Governor would closely watch bank funding costs. If there was pressure on banks to lift rates again, the Reserve Bank would be concerned about the implications for economic growth and would pre-emptively trim cash rates.
Certainly the Reserve Bank will also closely watch Chinese monetary policy decisions following the recent downward revision to the economic growth forecast for 2012. The decision probably is more a strategic decision to manage expectations rather than being a true forecast. But if the Chinese economy were to slow, then the Reserve Bank would have no hesitation about cutting interest rates to stimulate consumer spending and housing investment.
Interest rate decision and past cycles
The Reserve Bank Board has left the cash rate at 4.25 per cent for the second month after previously electing to cut rates at both the November and December meetings, each by 25 basis points. (The Reserve Bank Board doesn’t meet in January). 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 7.40 per cent, broadly in line with the long-term average or “normal” rate of 7.20 per cent.
What are the implications of today’s decision?
No surprises this month. Last month most economists tipped a rate cut and were caught out. Why were all the so-called “experts” wrong? The missing ingredient was Reserve Bank views on last year’s rate cuts. Economists weren’t aware that the Reserve Bank thought there would be only partial pass-through of the late 2011 rate cuts. Clearly when it came to the February Board meeting, members thought there were already enough stimuli being applied to the economy.
If interest rates are left unchanged for a few months and global financial markets continue to settle then businesses and consumers will have more confidence to spend, borrow, invest and employ. We expect that home building will lift over 2012 in response to tight rental vacancy rates, low interest rates, a firmer job market and rising migration.
Savers remain in the ascendancy. 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 4.40 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 was to turn ugly.
The Aussie dollar is on the Reserve Bank’s radar screen. If commodity prices fall but the Aussie doesn’t budge then this would represent a tightening of conditions, possibly prompting a Reserve Bank rate cut.
