Reserve Bank believes its rate cuts are working: CommSec's Craig James

Reserve Bank believes its rate cuts are working: CommSec's Craig James
Reserve Bank believes its rate cuts are working: CommSec's Craig James

EXPERT OBSERVER

What has changed since the last meeting?

The CoreLogic national home price index rose by 1.7% in November – the biggest rise in 16 years.

Wages rose 0.5% in the September quarter to be up 2.2% on the year.

Building approvals fell by 8.1% in October.

Business confidence and conditions rose in October.

Job ads fell by 1.7% in November. 

Private sector credit annual growth fell from 2.7% to a 9½-year low of 2.5% in October.

Employment fell by 19,000 in October – the first fall in 17 months.

The jobless rate rose from 5.2% to 5.3%.

In the twelve months to October 2019, the Budget deficit stood at just $78 million.

New business investment (spending on buildings and equipment) fell by 0.2% in the September quarter to be down by 1.3% over the year.

The rolling annual trade surplus was a record $63.35 billion in the year to September.

The Australian dollar has generally held around US66-69 cents.

The US and China are still reportedly progressing on a ‘Phase 1’ trade deal.

US and Australian share markets hit record highs in November.

The Reserve Bank Governor spoke on ‘unconventional monetary policies’.

The assessment

The Reserve Bank emphasises that rate cuts are indeed working. “The lower cash rate has put downward pressure on the exchange rate, which is supporting activity across a range of industries. It has also boosted asset prices, which in time should lead to increased spending, including on residential construction. Lower mortgage rates are also boosting aggregate household disposable income, which, in time, will boost household spending.”

The Reserve Bank has left the cash rate at 0.75% after cutting rates in June, July and October, each by 25 basis points. There have now been 15 rate cuts since November 2011 with the cash rate cut from 4.75%.

Reserve Bank believes its rate cuts are working: CommSec's Craig James

Previously rates rose seven times from October 2009 to November 2010 from 3.00% to 4.75%.

Interest rates are set to stay low for an extended period. The latest monthly reading suggests that inflation remains stuck near 1.5% – well below the Reserve Bank’s 2-3% target zone.

Rates could still go lower but the Reserve Bank seems prepared to play the waiting game. The Reserve Bank has emphasised that the rate cuts are indeed working, suggesting it may allow more time before deciding the next rate move. While rate cuts have caused confidence to weaken, the RBA is asking people to focus on the positives of lower rates like higher home prices and a lower Aussie dollar.

The Commonwealth Bank Group has pencilled in another rate cut in February. But fiscal policy stimulus is preferred. The mid-year budget review is handed down later in December.

The statement from the previous November 2019 meeting is on the left; the statement from today’s December 2019 meeting is on the right. Emphasis has been added to highlight key points in the wording in the statements.

The Reserve Bank emphasises that rate cuts are indeed working. “The lower cash rate has put downward pressure on the exchange rate, which is supporting activity across a range of industries. It has also boosted asset prices, which in time should lead to increased spending, including on residential construction. Lower mortgage rates are also boosting aggregate household disposable income, which, in time, will boost household spending.”

Perspectives on interest rates

The Reserve Bank has left the cash rate at 0.75% after cutting rates in June, July and October, each by 25 basis points. There have now been 15 rate cuts since November 2011 with the cash rate cut from 4.75%.

Previously rates rose seven times from October 2009 to November 2010 from 3.00% to 4.75%.

What are the implications of today’s decision?

Interest rates are set to stay low for an extended period. The latest monthly reading suggests that inflation remains stuck near 1.5% – well below the Reserve Bank’s 2-3% target zone. 

Rates could still go lower but the Reserve Bank seems prepared to play the waiting game. The Reserve Bank has emphasised that the rate cuts are indeed working, suggesting it may allow more time before deciding the next rate move. While rate cuts have caused confidence to weaken, the RBA is asking people to focus on the positives of lower rates like higher home prices and a lower Aussie dollar.

The Commonwealth Bank Group has pencilled in another rate cut in February. But fiscal policy stimulus is preferred. The mid-year budget review is handed down later in December.

Craig James is the chief economist at CommSec.

Craig James

Craig James

Craig James is the Chief Economist at CommSec, interpreting ‘big picture’ economic and financial trends.

Tags: 
Reserve Bank Economics

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