Rates unchanged, easing bias returns: CommSec's Craig James

Rates unchanged, easing bias returns: CommSec's Craig James
Rates unchanged, easing bias returns: CommSec's Craig James

The cash rate has been left at a record low of 2.00% for a sixth month (seven months of rates at 2%).

The Reserve Bank Board has re-instituted the easing bias – meaning that if rates are going to change, it is more likely to be a rate cut.

What does it all mean?

When appearing before the House of Representatives Economics Committee on September 18, the Reserve Bank Governor made the following remarks on official interest rates: "I think we are pretty content where we are right now.” The Governor did note however: “But the question has more been, for us: do we hold or should we go down a little bit more?” Well, the Reserve Bank Board has had another long, hard look at monetary settings and concluded that current rate settings still remain appropriate. But the easing bias is back. Just as the Governor said in September, the question is whether rates need to fall further.

It is important to stress that the ‘easing bias’ is more of an insurance policy rather a definite indication that rates are going to fall in future. The Reserve Bank has actually upgraded its view on the economic outlook: “the Board judged that the prospects for an improvement in economic conditions had firmed a little over recent months”.

The ‘easing bias’ is driven more by the fact that inflation is well contained: “the outlook for inflation may afford scope for further easing of policy, should that be appropriate to lend support to demand”. In short, it is a very smart decision.

Over the last month the main developments were the decisions by major banks to lift mortgage rates to cover the cost of higher capital requirements. Most of these increases will be effective later in November. In terms of economic data, inflation printed at the low end of market expectations. But there is still the prospect of retailers passing through to consumers the higher cost of imported goods.

Overseas, the US Federal Reserve left interest rates unchanged but hinted at a rate hike in September. But China cut interest rates and the European Central Bank confirmed that it would do all that it required to lift economic growth in the region and eliminate deflationary risks.

In Australia, economic data has been generally positive – as highlighted in the Reserve Bank’s upgrade to the economic outlook. Consumer and business confidence levels have lifted; building approvals and car sales both lifted to record highs on an annual basis; consumer spending and job ads both rose in the latest month.

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%. 
Rates unchanged, easing bias returns: CommSec's Craig James

What are the implications of today’s decision?

CommSec doesn’t expect any change in the cash rate for the foreseeable future. Inflation is under control but we believe it has more potential to rise rather than fall with the lower exchange rate pushing up prices of imported goods. The economy is well supported by record building approvals which are serving to lift many boats across the country.

Investors will need to continue researching the best returns on their investments with both interest rates and inflation remaining at historically low levels. In terms of ‘safe-haven’ cash-based investments, online bank accounts may offer better value than term deposits. Certainly blue-chip Australian companies offer attractive fully- franked dividends, especially for investors with longer-term time horizons. 
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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