Reserve Bank ponders next move

RBA cuts interest rates by 25 basis points.

Reserve Bank Board meeting

• The Reserve Bank Board has cut the official cash rate by 25 basis points or a quarter of a per cent to 2.50 per cent. It was the first rate cut since May and keeps official rates at the lowest levels recorded in 53 years. It was the first cut in official interest rates in an election period. The Reserve Bank has signalled that rates are on hold for now. The next RBA Board meeting is on September 4 2013.
• While the cash rate has fallen to the lowest levels in more than 50 years, key lending rates like the bank variable housing rate are still above historic lows. If the rate cut is passed on, the variable rate would fall to 5.95 per cent, still above the 41-year low of 5.75 per cent that existed from April-May 2009.

What does it all mean?

• There was one subtle change in the wording of the accompanying statement. Rather than leaving scope for further rate cuts, the Reserve Bank now says it is happy to wait for a while before acting again. It is our belief that the economy will pick up after the election. The Reserve Bank is also waiting to see what happens post-election.
• At 2.50 per cent, the cash rate is broadly equivalent to official rates that existed in late 1959/early 1960. But a key reason why the cash rate is at current levels is because banks were constrained from passing on in full the rate cuts delivered from 2008-2013. In more “normal” times, the official cash rate would currently be around 4.00-4.25 per cent – similar to the low reached in December 2001.
• In gauging how “loose” monetary policy settings are, the Reserve Bank focuses on key lending rates like the variable housing rate and small business overdraft rate. If today’s rate cut gets passed on in full, the variable housing rate would still be around 20 basis points above the lows set in the global financial crisis and around 1 percentage point above the lows set in 1959 and 1960.
• Monetary policy is supporting economic growth but interest rate levels are by no means at “emergency” levels. Simply, with inflation contained, the mining boom easing and the global economy still getting back on its feet, we can have stimulatory monetary policy settings in Australia.
• The Reserve Bank Governor has suggested that the new “normal” level of the cash rate could be lower than in the past. Certainly if inflation can be contained between 2-3 per cent, a “normal” cash rate could be around 3.5-4.0 per cent rather than levels near 5.5 per cent.
  • The Reserve Bank Board has cut the cash rate by 25 basis points to 2.50 per cent. The previous rate cuts were in May 2013 (25 basis points), December 2012 (25 basis points), October 2012 (25 basis points), June 2012 (25 basis points), May 2012 (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”. If variable housing rates of major banks fall to 5.95 per cent, this would be below the long-term average or “normal” rate of 7.20 per cent but still above the 41-year low of 5.75 per cent recorded in April-May 2009.
    • CommSec hopes that this is the last interest rate cut in the cycle. If borrowers cannot afford repayments at these levels then it is doubtful that they should be borrowing at all. Cash rates are at historic lows at present but will eventually rise over the next few years as domestic and global economies recover.
    • Low interest rates, combined with a weaker Aussie dollar, are acting to support growth in the economy. It is up to businesses and consumers to respond to the attractive settings. But it all gets down to confidence. We wouldn’t expect the economy to lift markedly until the Federal Election has been run and won.
    • Savers need to apply more thought about where they put their savings. That is a key message from the Reserve Bank Governor. Encouragingly the Reserve Bank Governor is not concerned about an “asset bubble” – unsustainable growth of property prices. Simply, attitudes towards debt are far different than in the past with consumers and businesses far more conservative.
    • This is the first rate cut in an election period. But just like the last election period when rates were increased, the rate move was well flagged, supported by all economists and justifiable.
    • The statement from the July meeting is on the right; the statement from today’s August 2013 meeting is on the left. Emphasis has been added to significant changes in wording in the recent statement.

Interest rate decision and past cycles

• The Reserve Bank Board has cut the cash rate by 25 basis points to 2.50 per cent. The previous rate cuts were in May 2013 (25 basis points), December 2012 (25 basis points), October 2012 (25 basis points), June 2012 (25 basis points), May 2012 (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”. If variable housing rates of major banks fall to 5.95 per cent, this would be below the long-term average or “normal” rate of 7.20 per cent but still above the 41-year low of 5.75 per cent recorded in April-May 2009.

What are the implications of yesterday’s decision?

• CommSec hopes that this is the last interest rate cut in the cycle. If borrowers cannot afford repayments at these levels then it is doubtful that they should be borrowing at all. Cash rates are at historic lows at present but will eventually rise over the next few years as domestic and global economies recover.
• Low interest rates, combined with a weaker Aussie dollar, are acting to support growth in the economy. It is up to businesses and consumers to respond to the attractive settings. But it all gets down to confidence. We wouldn’t expect the economy to lift markedly until the Federal Election has been run and won.
• Savers need to apply more thought about where they put their savings. That is a key message from the Reserve Bank Governor. Encouragingly the Reserve Bank Governor is not concerned about an “asset bubble” – unsustainable growth of property prices. Simply, attitudes towards debt are far different than in the past with consumers and businesses far more conservative.
• This is the first rate cut in an election period. But just like the last election period when rates were increased, the rate move was well flagged, supported by all economists and justifiable.

Comparing the two most recent statements

• The statement from the July meeting is on the right; the statement from today’s August 2013 meeting is on the left. Emphasis has been added to significant changes in wording in the recent statement.