The Reserve Bank Board has left the official cash rate at 3.50 per cent for the third straight month.
- The variable housing rate is applying modest stimulus to the economy at present at 6.85 per cent, below the 15-year average of 7.20 per cent. The next RBA Board meeting is on October 2 2012.
- The Reserve Bank focussed on global developments: Regarding China “some recent indicators have been weaker, which has added to uncertainty about near-term growth. Around Asia generally, growth is being dampened by the more moderate Chinese expansion and the weakness in Europe.”
What does it all mean?
It is clear that the Reserve Bank is happy to remain on the interest rate sidelines – at least for the time being. Policymakers seem comfortable with domestic economic conditions but continue to watch the global situation carefully. Europe, the US and Asia have slowed and the central bank seems particularly focused on the slowdown in China, given its importance to Australia’s growth profile.
There are yet to be credible signs that of a turnaround in Chinese activity. In fact the latest manufacturing data suggested that the contraction in exports continues to affect the growth profile of the biggest consumer of Australian raw materials. Interestingly the statement accompanying the “no change” decision highlighted that Board members discussed the sharp slide in “key natural resources”. And looking forward if a further severe decline in the commodity prices took place the Reserve Bank would reassess its economic outlook given a less robust boost to incomes.
At present, the fact that the Reserve Bank is content to stay on the interest rate sidelines is a mark of confidence in current settings. Not only have interest rates been lowered in recent months but there have also been government handouts and tax cuts. And it takes time for these stimulus measures to work its way through the economy.
Despite the fact that interest rate have remained unchanged for three consecutive months it is unlikely to be the end of the interest rate cutting profile. In fact market pricing is now for a full 1 per cent worth of rate cuts over the next 12 months. And one could argue that there are plenty of domestic reasons for the Reserve Bank to be cutting rates in the next couple of months – particularly given the slide in the latest round of retail sales figures and ongoing weakness in job advertisements.
However the Reserve Bank still holds to the central view that the longer-term outlook for the Australian economy remains sounds and the latest upgrade to domestic growth forecasts in the monetary policy statement confirmed that view. As such, while rate cuts are still likely it will be a much more considered response.
CommSec believes that more rate cuts are possible over coming months and we have pencilled in another quarter per cent rate cut in November – after the next round of inflation data. Hopefully this rate cut won’t be required. That is, European officials act with urgency to stabilise financial markets, the US economic recovery gathers pace, the Chinese economy lifts and Aussie consumer confidence improves providing a catalyst to spend, invest and borrow again. But a lot does have to go right for this scenario to take place.
Interest rate decision and past cycles
The Reserve Bank Board has left the cash rate 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 6.85 per cent, below the long-term average or “normal” rate of 7.20 per cent. The RBA notes that “interest rates for borrowers (are) a little below their medium-term averages.” In other words stimulus is still very modest.
What are the implications of today’s decision?
The fiscal and monetary stimulus applied over the last few months will gradually work its way through the economy in coming months, 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.
For some consumers and businesses confidence is generated when the Reserve Bank Board decides to cut interest rates. But the fact that the Reserve Bank didn’t cut rates this month arguably should inspire even greater confidence. Inflation is below 2 per cent, unemployment is near 5 per cent, and economic growth is the fastest of advanced nations. There is plenty to inspire confidence.
But make no mistake; the Reserve Bank is well prepared to cut rates again if necessary. The global outlook is still uncertain. At the same time the Aussie dollar remains high despite “the weaker global outlook”.
And inflation remains low – although the Reserve Bank warns that growth in domestic costs need to keep moderating. Certainly our cash rate is still high compared with other nations at 3.50 per cent, so there is plenty of ammunition available.
The Reserve Bank seems to be waiting on the next round of inflation data which is released at the end of October before deciding on further rate cuts. A low inflation reading would allow policymakers to feel more comfortable about cutting rates in coming months, if they deem it is necessary.
Retailers are likely to find trading condition tough in the short-term an improvement in confidence will be required to see a sustained shift in spending patterns.
