RBA keeps interest rates on hold
The Reserve Bank Board has left the official cash rate at 3.00 per cent for the third straight month, so both borrowers and depositors have reason to cheer another month of stable rates.
An easing bias remains firmly in place: “The inflation outlook, as assessed at present, would afford scope to ease policy further, should that be necessary to support demand.”
What does it all mean?
- If rates had been cut today, what would have been the reaction? Would it have led consumers and businesses to celebrate the drop in rates, focussing on the stimulus to the economy? Or instead, would people have been fearful, wondering if the rate cut meant there was more bad news ahead for domestic and global economies? Arguably, with interest rates already at super-low levels, it probably would have been more of the latter.
- Interest rates are cut if the economy needs more stimulus or insulation from jitters abroad, and the inflation situation allows it. So a rate cut today would have been a concern.
- There has been plenty of good news over the past month. The Aussie dollar has eased, home prices have risen, job ads are recovering, sharemarkets have trended higher and retail spending rose in January while retailers are reporting better sales for February. Add into the equation more settled conditions in the global economy and few should have been surprised that rates were left on hold.
- With the value of bank deposits now exceeding home loans by a record margin, the key question is how does the Reserve Bank set monetary policy in the future? Aussies – especially young Aussies – are displaying a greater preference to rent, rather than borrow a large sum of money and buy or build a home. Generally consumers are keener to pay off debt and increase savings. So a rate hike may boost income levels in the future to a greater extent than it provides grief for borrowers or discourages more people to take on debt.
- In some countries, such as China, measures such as changes in bank reserve requirements are used in preference to interest rates to implement monetary policy. Clearly if the Reserve Bank was to embark on changes to the conduct of monetary policy there will need to be a lot more public discussion and research undertaken.
- CommSec expects the Reserve Bank to stay on the interest rate sidelines for the next few months. While an easing bias is likely to be maintained – a preference to cut rates – we don’t expect the Reserve Bank to act on that bias. The longer the period of interest rate stability, the greater the likelihood that the Reserve Bank will look to lift rates from super-low levels in the future. A “normal” or neutral level for the cash rate would be around 4 per cent.
Interest rate decision and past cycles
- The Reserve Bank Board has 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?
- The gap between the “special” bank term deposit rate and the cash rate stands at 125 basis points (1.25 percentage points), well above the decade average of 45 basis points. So banks are still competing hard to raise funds locally and savers are the big winners. But banks don’t just have to compete amongst themselves for deposit funds as higher returns on property and equities markets are tempting savers to switch away from bank term deposits. While there is speculation that banks may cut rates outside the RBA rate setting cycle, there are a number of factors to consider.
- Last month consumer confidence soared almost 8 per cent in response to the decision to leave rates unchanged. If consumers are similarly happy after today’s rate decision then retailers and other consumer focussed businesses will have reason to cheer.
- While savers have reason to cheer high term deposit rates, borrowers have reason to cheer record low 3-year fixed home loan rates. Borrowers face a big decision about whether to leave their home loan at variable interest rates or fix all or some of their borrowings.
- The Aussie dollar bears watching closely in coming months. Overnight the Aussie approached US101 cents – a 7-month low – but the Aussie has rebounded to near US102 cents. The Reserve Bank is probably more comfortable when the Aussie is closer to US95-100 cents.