The Reserve Bank Board left the official cash rate on hold at 3.50 per cent. The cash rate is at the lowest level in 2½ years (December 2009). The next RBA Board meeting is on August 5 2012.
The Reserve Bank leaves the door open for further cuts. “At today’s meeting, the Board judged that, with inflation expected to be consistent with the target and growth close to trend, but with a more subdued international outlook than was the case a few months ago, the stance of monetary policy remained appropriate.”
What does it all mean?
The Reserve Bank is back in wait and see mode. After providing the economy with substantial rate cuts over the past couple of months the Reserve Bank has once again stepped to the sidelines. The statement following the “no change” decision was decidedly cautious highlighting the potential adverse risks surrounding Europe. Given the added level of insurance taken out in the last few months the Reserve Bank can afford to sit back and get a better gauge of what effect the rate cuts have had in spurring activity.
Importantly from an economic sense interest rates are below long-term averages, inflation is at the lower end of the target band, monetary policy is at a stimulatory setting and economic growth is picking up pace albeit from below trend levels – allowing the Reserve Bank time to get a more accurate picture of the economic landscape.
The anecdotal evidence suggests that activity levels have shown signs of improvement in recent months. House prices have started to rise, businesses are more willing to borrow given the attractive rates on offer and it is likely that retail sales will benefit from the Federal government handouts over coming months. Granted there are still an array of sectors that are finding conditions difficult, however the tough trading conditions is more as a result of a lack of confidence than any significant structural issue.
Given the considerable degree of stimulus that has been thrown into the mix, the focus will shift to the challenges that the Australian economy is likely to face. And front and centre is the underlying strength in employment and the structural shift that is taking place across the economy given the mining boom and accompanying higher exchange rate.
In addition the dramatic shift in European policy over the past week would provide the Reserve Bank with a degree of encouragement, but it is the next few weeks which will be more telling in providing a better understanding the stability across the euro zone.
From the Reserve Banks perspective China is likely to also be a watching brief. If activity levels slow dramatically and commodity prices weaken further the Reserve Bank will be less hesitant to cut interest rates.
If rates are likely to move anywhere in coming months, the risk is clearly on the downside. Manufacturing, services and construction sectors are still finding conditions difficult while inflation is well contained. We have pencilled in a rate cut in August – after the next batch of inflation figures in late July.
Interest rate decision and past cycles
- The Reserve Bank Board kept the cash rate steady at 3.50 per cent. The previous rate cuts were in June (25 basis points), May (50 basis points) and November and December 2011 (each by 25 basis points).
- Prior to those moves 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 per cent 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 variable housing rates of major banks are around 7.05 per cent, slightly below the long-term average or “normal” rate of 7.20 per cent.
- The RBA says that “interest rates for borrowers have declined to be a little below their medium-term averages.” In other words stimulus is still very modest.
What are the implications of today’s decision?
It is clear that the Reserve Bank is waiting on the inflation data which is released at the end of July. A low inflation reading would allow policymakers to feel more comfortable about cutting rates in coming months, if they deem it is necessary.
Retailers have reason to be hopeful. Consumer spending power has been boosted in the past few months. Not only have interest rates fallen but also cheaper petrol prices are supporting household balance sheets. The key will be confidence.
The rate cuts will provide a modest degree of stimulus however given the downside risk to global growth it likely that policymakers will maintain an easing bias. CommSec expects rates to be cut once more within the next three months.
4 July 2012