Interest rates locked in holding pattern: Craig James

Interest rates locked in holding pattern: Craig James
Interest rates locked in holding pattern: Craig James

GUEST OBSERVER

The cash rate has been left at a record low of 2% for a fourth month. The Reserve Bank has left the outlook statement unchanged – almost word-for-word.

What does it all mean?

The last thing that Aussies want at the moment is volatility. So it is encouraging to see that official interest rates have been left unchanged for another month. And it is useful to reflect on the strong position that the Reserve Bank is in. Rates could easily be cut further, if there was the need. That is more than the central banks of most advanced economies can claim.

The good news is that there is no need for the Reserve Bank to supply more stimulus to the economy. The cash rate is at record lows; market-determined interest rates aren’t far off record lows; the Aussie dollar is near 5-year lows; and the Government is providing stimulus via lower small business tax rate and asset write-down provisions.

Also consider the fact that inflation is at the low end of the 2-3% Reserve Bank target band. The economy continues to record modest, but not great, economic growth and unemployment is largely unchanged on a year ago. The lift in business investment expectations, lift in business spending and record levels for home building approvals highlights the momentum of the economy.

Was there the need to say something new or different? No. The only interesting point is that the Reserve Bank notes “stronger US growth” and also notes that the Federal Reserve is likely to increase rates “over the period ahead” rather than “later this year.” The Reserve Bank appears to be betting on a September rate hike.

On the Australian dollar there has been no change in the Reserve Bank view – seemingly Board members are “happy” with an Aussie near US71-72 cents: “The Australian dollar is adjusting to the significant declines in key commodity prices.”

On the economy, the Reserve Bank continues to mull whether the speed limit of the economy has declined: “In Australia, most of the available information suggests that moderate expansion in the economy continues. While growth has been somewhat below longer-term averages for some time, it has been accompanied with somewhat stronger growth of employment and a steady rate of unemployment over the past year.”

On home prices, the Reserve Bank continues to monitor 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%.
 
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.

Interest rates may not fall again this cycle. However, having said this, variable rates are unlikely to rise until 2016. The main area to watch is fixed interest rates. If the US Federal Reserve starts its rate hiking cycle in just over a fortnight, the risk is that fixed rates will start to lift across the globe.
 
Investors still have plenty of attractive opportunities across financial markets to generate returns. But they need to do their homework. Term deposit rates remain low, but online cash accounts offer greater attraction. And many blue-chip shares are offering dividend yields including NAB (6.31%), Westpac (5.95%), BHP Billiton (6.61%) and Rio Tinto (5.92%). 
 
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.

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Interest Rates Reserve Bank

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