RBA exhibits quiet confidence

The Reserve Bank Board has left the official cash rate at 3.00 per cent at its first meeting in 2013.

The variable housing rate is applying modest stimulus to the economy at present at 6.45 per cent, well below the 15-year average of 7.20 per cent. The next RBA Board meeting is on March 5 2013.

The Reserve Bank exhibits a quiet confidence: “the demand for some categories of consumer durables has picked up; housing prices have moved higher; there are early indications of a pick-up in dwelling construction; and savers are starting to shift portfolios towards assets offering higher expected return.”

 

 
What does it all mean?

• After cutting rates by 1.25 percentage points in the space of nine months the Reserve Bank is clearly now in “wait and see” mode.
• The global economy has improved and downside risks have abated in addition “growth in China has stabilised at a fairly robust pace. Around Asia generally, growth was dampened by the earlier slowing in China and the weakness in Europe, but again there are signs recently of stabilisation. Some commodity prices have firmed over recent month”. So the Reserve Bank is maintaining a watchful stance.
• Interestingly the statement following the “no change” decision made it very clear that prior rate cuts are starting to garner traction and foster activity. Board members discussed the shift in psychology of households. House prices were rising, retail activity was picking up and more importantly savers were shifting portfolios towards riskier asset classes. Loose monetary policy will continue to provide stimulus over coming months.
  But make no mistake; the Reserve Bank is well prepared to cut rates again if necessary. Especially given that “the inflation outlook, as assessed at present, would afford scope to ease policy further, should that be necessary to support demand”.
• Then there is the concern of the higher exchange rate. While the Aussie dollar may have been largely stable against the US dollar over the past month it has hit record highs against Australia’s trade weighted index – a broader measure of Australia’s currency. The higher currency continues to deter an array of sectors including manufacturing and tourism. And given that domestic interest rates are still well above levels in advanced nations across the globe, there is plenty of ammunition left.
• 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 share markets and housing activity has improved. Boosting economic activity and asset prices. In the past we have mentioned that the key is confidence and it does seem that households and businesses are more optimistic about the outlook.
• CommSec believes that while the Reserve Bank will maintain an easing bias further rate cuts are unlikely in the near term unless a left field event takes place – ie a resumption of the euro zone debt crisis. Rather the Reserve Bank looks set to jawbone and talk down interest rates rather than actually cutting rates and moving even further away from neutral or “normal” settings. Rates look like they have bottomed or are very close to the low.

Interest rate decision and past cycles

• The Reserve Bank Board left the cash rate on hold at 3.00 per cent. The previous rate cuts were in December (25 basis points), October (25 basis points), 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 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 6.45 per cent, below the long-term average or “normal” rate of 7.20 per cent but well above the 41-year low of 5.75 per cent recorded in April-May 2009.

What are the implications of today’s decision?

• 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 at 2.5 per cent, unemployment is near 5.5 per cent and economic growth is the fastest of advanced nations. There is plenty to inspire confidence.
• But the Reserve Bank will need to be mindful of the contractionary effects of the Australian dollar. The fact that interest rates are on hold may result in the Aussie dollar gravitating higher. Reserve Bank officials undertook subtle jawboning on the currency earlier in the year and a repeat dose may be necessary.
• If investors haven’t got the message already, they should after today’s no change decision. That is, they need to shop around to get the best return on their money. That means looking at the returns provided by other assets like shares and property.