Reserve Bank alert but not alarmed

Reserve Bank alert but not alarmed
Reserve Bank alert but not alarmed

GUEST OBSERVER

The Reserve Bank has maintained its “neutral stance” – meaning that rate hikes are as likely as rate cuts in the period ahead.

In practice though no change in rates is likely.

What does it all mean?

The Reserve Bank Board is comfortably on the interest rate sidelines. Much would need to go wrong at home and/or abroad for the Reserve Bank to cut rates again. At the same time, rate hikes are off the agenda. In essence policymakers are giving households and business more time to work with record low interest rates, and forget about rate movement and get on with spending, hiring and investing.

There are signs that the economy is lifting from its early 2017 malaise. Retail activity is lifting, unemployment is at 4-year lows, job vacancies are at 61⁄2-year highs and importantly record home building and a large pipeline of infrastructure spending will support the economy over 2017.

The key is how business investment plans evolve over the coming year. And most of the indicators suggest that the future outlook is encouraging. Corporate Australia is being supported by strong business conditions, upbeat confidence, high capacity use, and healthy profits – all conducive to a lift in hiring and investment over the coming year.  

No surprises there are still a couple of ‘hot button’ issues to monitor at present: home prices; household debt levels, subdued wage growth and the Aussie dollar. And while policymakers remain upbeat about the medium term prospects for the economy there is a clear understanding that “consumption growth remains subdued” largely due to “slow growth in real wages and high levels of household debt”. 

Importantly the RBA reiterated its view that while the “growth in housing debt has outpaced the slow growth in household incomes. The recent supervisory measures should help address the risks associated with high and rising levels of household indebtedness”.

Perspectives on interest rates 

The Reserve Bank has left the cash rate at 1.50 per cent. The previous move was a rate cut in August 2016 (25 basis points). There have now been 12 rate cuts since November 2011, with the Reserve Bank cutting rates from 4.75 per cent to 1.50 per cent. 

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 today’s decision? 

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Reserve Bank alert but not alarmed

 

There is no urgency for rates to move in any direction. On the positive side of the ledger are record corporate profits; strong business conditions; a lift in infrastructure spending; firm home building; and the prospect of further job growth.

On the other side of the ledger, wage and price growth is low; consumer spending is fluky; home price growth is slowing; and the Aussie dollar remains firm.

The Reserve Bank is expected to maintain its neutral policy stance for an extended period.We expect the Reserve Bank to stay on the interest rate sidelines for the 2017 year.

Savanth Sebastian is an economist for CommSec 

 
Tags: 
Interest Rates Reserve Bank

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