The cash rate has left at a record low of 2.25 per cent. There is a clear bias to cut rates again.
What does it all mean?
The Reserve Bank has made a strategic decision and is conserving its ammunition. Rates may be cut again if the economy needs a bit more help. But there is no urgency, no panic. The statement is short, sharp and to the point. And that’s why the decision can be applauded. Consumers won’t be spooked by successive rate cuts. But rates are still low, and can fall further. So the decision is positive for confidence and hopefully causes more consumers and businesses to spend, invest and employ.
There is a clear bias to cut rates again: “At today’s meeting the Board judged that, having eased monetary policy at the previous meeting, it was appropriate to hold interest rates steady for the time being. Further easing of policy may be appropriate over the period ahead, in order to foster sustainable growth in demand and inflation consistent with the target. The Board will further assess the case for such action at forthcoming meetings.”
But with interest rates at generational lows (not record lows – housing rates in the 1950s were lower) the question is where do we go from here. And there are so many questions to be answered.
What are ‘normal’ rates?
Do rate cuts still work?
Are negative interest rates the new ‘norm’?
If rate cuts don’t work as well as in the past, what other tools can be applied?
Certainly the global financial crisis changed things, particularly attitudes towards debt. Now even low interest rates are failing to entice consumers and businesses to take on debt. At the same time, global financial troubles have weighed on confidence levels, restraining economic growth and inflation, and thus justifying lower interest rates. And advances in technology and online shopping have increased competitive pressures on businesses, restraining prices and inflation. Simply, people can buy goods from anywhere, adding new competitive pressures to pricing.
While the current generation may think that the era of super-low interest rates are amazing, it’s important to note that rates were even lower in the 1950s. Bank mortgage rates stood at 3.88 per cent in June 1950, whereas the current variable mortgage rate from the major banks is today around 5.65 per cent (fixed rates around 4.70 per cent).
The last rate cut was in February 2015 (25 basis points), taking the cash rate to a record low of 2.25 per cent.
There have been nine rate cuts since November 2011.
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.
Savers should have got the message by now – low interest rates are here to stay – at least for the next year, and possibly longer. As a result, savers need to secure the best possible returns, given the level of risk that they are comfortable with.
Listed companies certainly have adjusted to the new environment, maintaining or lifting dividends to attract new investors. In the recent profit-reporting season, 86 per cent of all ASX 200 companies that reporting half-year results issued a dividend, above the long-term average of 83.7 per cent. Of all companies issuing dividend, 68 per cent lifted dividends, 24 per cent maintained dividends while only 8 per cent cut dividends.
This is a new era for interest rates. The Reserve Bank will no doubt openly discuss the new environment over coming months, questioning whether rates can stay at current levels or fall further and provide a judgement about whether future rate cuts can still be effective in boosting economic activity.
The fundamental factor holding back the Australian economy is confidence. Broadly, so-called economic fundamentals remain favourable. Inflation is low, interest rates are low, the budget deficit is still only around 2.5-3.0 per cent of GDP and home building is at record highs. Consumers and businesses just need more confidence to spend, invest and employ.
The Reserve Bank may not have finished cutting rates. But Reserve Bank researchers, senior officials and Board members alike will do some soul searching in coming months to determine the best strategy to adopt in the new low rate era. CommSec continues to factor in one more rate cut with timing still an open question.
Perspectives on interest rates
The last rate cut was in February 2015 (25 basis points), taking the cash rate to a record low of 2.25 per cent.
There have been nine rate cuts since November 2011.
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.
What are the implications of yesterday’s decision?
Savers should have got the message by now – low interest rates are here to stay – at least for the next year, and possibly longer. As a result, savers need to secure the best possible returns, given the level of risk that they are comfortable with.
Listed companies certainly have adjusted to the new environment, maintaining or lifting dividends to attract new investors. In the recent profit-reporting season, 86 per cent of all ASX 200 companies that reporting half-year results issued a dividend, above the long-term average of 83.7 per cent. Of all companies issuing dividend, 68 per cent lifted dividends, 24 per cent maintained dividends while only 8 per cent cut dividends.
This is a new era for interest rates. The Reserve Bank will no doubt openly discuss the new environment over coming months, questioning whether rates can stay at current levels or fall further and provide a judgement about whether future rate cuts can still be effective in boosting economic activity.
The fundamental factor holding back the Australian economy is confidence. Broadly, so-called economic fundamentals remain favourable. Inflation is low, interest rates are low, the budget deficit is still only around 2.5-3.0 per cent of GDP and home building is at record highs. Consumers and businesses just need more confidence to spend, invest and employ.
The Reserve Bank may not have finished cutting rates. But Reserve Bank researchers, senior officials and Board members alike will do some soul searching in coming months to determine the best strategy to adopt in the new low rate era. CommSec continues to factor in one more rate cut with timing still an open question.
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