Biggest change from RBA on Aussie dollar: Craig James

Biggest change from RBA on Aussie dollar: Craig James
Biggest change from RBA on Aussie dollar: Craig James

GUEST OBSERVER

What does it all mean?

The biggest change in the text accompanying the interest rate decision were the comments relating to the Aussie dollar. Since May last year the RBA has suggested that the Aussie dollar was too high in relation to commodity prices. In April 2015 the RBA indicated that further depreciation of the Aussie dollar was “likely”. And in recent months it has noted depreciation was “likely and necessary”. In the latest statement the RBA merely says that “The Australian dollar is adjusting to the significant declines in key commodity prices.” 
 
That doesn’t mean that the Aussie dollar won’t fall further, but the RBA is seemingly happy with the adjustment that has occurred to date. In other words, the dollar is broadly where it needs to be. 
 
In terms of the economy, the only real issue is the exuberance by property purchasers in Melbourne and Sydney. Still, banks have lifted interest rates on residential investment loans in response to requests from APRA to restrain investor enthusiasm. At the same time, the supply of residential properties is set to lift in Melbourne and Sydney over the coming 18 months judging by data on council approvals to build new dwellings. The increased supply of homes (new construction) will gradually meet the elevated demand and therefore temper growth in home prices. 
 
The majority of private sector economists believe that official interest rates will be unchanged over the coming year. However, a small number of economists still believe that there is scope for the Reserve Bank to cut rates again. 
 
On the economy, the Reserve Bank continues to mull whether the speed limit of the economy has declined: “In Australia, the available information suggests that the economy has continued to grow. While the rate of growth has been somewhat below longer-term averages, it has been associated with somewhat stronger growth of employment and a steady rate of unemployment over the past year.” 
 
On home prices, the Reserve Bank is watching developments closely: “Dwelling prices continue to rise strongly in Sydney, though trends have been more varied in a number of other cities. The Bank is working with other regulators to assess and contain risks that may arise from the housing market.”
  • Perspectives on interest rates 
  • The previous rate cut was in May 2015 (25 basis points), taking the cash rate to a record low of 2.00%. 
  • There have been 10 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% to 4.75% 

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Biggest change from RBA on Aussie dollar: Craig James

What are the implications of today’s decision?

  • We remain on the belief that the Reserve Bank is reluctant to cut rates again, with the central bank questioning whether another rate cut would actually give the economy a boost or whether it would be counter-productive. If the Reserve Bank was to cut interest rates again – and it wasn’t in response to a major negative event – then it may very well be the case that many Australians would become less, rather than more, confident, questioning just how bad the economy really was if further rate cuts are deemed necessary.

  • Residential property investors need to do their homework. Some lenders have lifted interest rates; other lenders have retreated either in part or in full from the residential investment property market. At the same time, a large number of apartment projects are underway across the country, especially in Melbourne and Sydney.

Those seeking a return on cash investments also have homework to do to ensure they are receiving the best returns available. 

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: 
Interest Rates Reserve Bank

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