Weaker dollar is an early Christmas present for the RBA: CommSec
CommSec chief economist Craig James said the Reserve Bank Board had received its Christmas present early this year – hence its decision yesterday to keep interest rates on hold.
"The board wanted a weaker dollar, and it has fallen US4 cents since the last board meeting. Furthermore, home building is lifting to meet higher demand, restraining growth in home prices. And the global economy continues to heal as evidenced by purchasing manager indexes.
"So, the Reserve Bank doesn’t need to touch interest rates."
As a result, the official cash rate remains at a 53-year low of 2.50%.
"Rate cuts are off the agenda – for now anyway," James said. "And it is too early to talk about the ‘normalisation’ of rates, or rate hikes. But stability is a good thing, supporting confidence levels."
James said rates are "at or near the bottom of the cycle, but rate hikes are probably quite some way off. If the economy continues to gather momentum, inflation remains under control and the Aussie dollar remains near US90c or eases further, then the Reserve Bank can happily stay on the interest rate sidelines."
The most recent rate cuts were in August (25 basis points), 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 that, James said, the Reserve Bank had lifted rates seven times from October 2009 to November 2010 – a total of 1.75 percentage points - from 3% to 4.75%.
"In the last rate-cutting cycle, the cash rate fell to a low of 3% in April 2009. In the previous rate-cutting cycle the cash rate fell to 4.25% in December 2001. In the two previous rate-cutting cycles, the cash rate fell to lows of 4.75%," he said.
"The Reserve Bank looks more closely at the variable housing rate to gauge how close rates are to ‘normal’. The variable housing rates at major banks average 5.95%, below the long-term average or “normal” rate of 7.20% and only slightly above the 41-year low of 5.75% recorded in April-May 2009."
"Since the last rate cut in August, the consumer confidence index has averaged 109.7 – the highest three-month average in three years. And it is likely that another month of interest rate stability will further support consumer confidence, and in turn, spending."
James said CommSec expects the Reserve Bank to stay on the interest rate sidelines for a while. "We hope to see further evidence that higher confidence levels are translating to higher consumer spending and hiring of staff by businesses. And there are already clear signs of a stronger housing market – home purchases, home prices and home construction."
Reserve Bank governor Glenn Stevens said global growth was running "a bit below average this year, with reasonable prospects" of a pick-up next year.
Commodity prices have declined from their peaks, but generally remain at high levels by historical standards. Inflation in most countries is well contained, he said.
"Overall, global financial conditions remain very accommodative. Volatility in financial markets has abated recently. Long-term interest rates remain very low and there is ample funding available for creditworthy borrowers."
Stevens said the economy "has been growing a bit below trend over the past year and the unemployment rate has edged higher. This is likely to persist in the near term, as the economy adjusts to lower levels of mining investment.
"Further ahead, private demand outside the mining sector is expected to increase at a faster pace, though considerable uncertainty surrounds this outlook. There has been an improvement in indicators of household and business sentiment recently, but it is still unclear how persistent this will be. Public spending is forecast to be quite weak."
Stevens said recent data on prices and wages show inflation to be consistent with the medium term target. The Bank's assessment is that this is likely to remain the case over the next one to two years.
He said an easing in monetary policy since late 2011 had supported interest-sensitive spending and asset values. "The full effects of these decisions are still coming through, and will be for a while yet. The pace of borrowing has remained relatively subdued to date, though recently there have been signs of increased demand for finance by households.
"There is also continuing evidence of a shift in savers' behaviour in response to declining returns on low-risk assets. Housing and equity markets have strengthened further over recent months, trends which should in time be supportive of investment.
"The Australian dollar, while below its level earlier in the year, is still uncomfortably high. A lower level of the exchange rate is likely to be needed to achieve balanced growth in the economy."
Loan Market director Mark De Martino said the decision to leave rates unchanged was "the right choice, but not a straightforward one", as the RBA had to consider the economic indicators speeding up and slowing down the economy.
He said the small falls in the dollar, and inflation remaining within its target range, were the principal factors keeping interest rates on hold to close the year.
"Business confidence has slipped after its post-election jump and our construction and resource investment sectors are areas to watch," he said. "But, on the other hand, consumer confidence is rising and the dollar appears to be adjusting to past rate cuts, as well as several other factors.
"A rate cut or rise would aid areas of the economy needing help, but the RBA’s holistic approach to balancing growth and inflation means it is best to keep rates steady. I think interest rate stability gives so many sectors confidence in doing business," he said.
De Martino said he expected home loan activity to continue to set "new highs" after the Australian Bureau of Statistics reported a 40-month-high in home loan approvals in September.