Reserve Bank gives view on rates: Craig James

Reserve Bank gives view on rates: Craig James
Reserve Bank gives view on rates: Craig James


In case there was some lingering uncertainty, the Reserve Bank Governor had made it clear that if rates were to move anywhere in the next six months it would be down, not up.

The Reserve Bank Governor has gone to some length to explain the thinking about recent increases in bank home loan rates and the impact on monetary policy. And the conclusion was that the higher bank loan rates won’t have a big impact on the broader economy, and thus not requiring a response from the Reserve Bank in terms of cutting interest rates.

The speech by the Reserve Bank Governor was entitled the “Path to Prosperity”. And there were key messages. There needs to be improvements in infrastructure. And on this point the Governor said “there are some encouraging developments.” Glenn Stevens also stressed the importance of productivity enhancements: “with the terms of trade-driven improvements now behind us – and at least partly reversing – productivity is the main game.” Stevens also noted the importance of budget repair: “The need for medium-term budget repair also remains.”

Car sales continue to soar to record levels, with SUVs the major catalyst. Record vehicle sales combined with yesterday’s data showing above-average growth of retail spending, confirms the Reserve Bank upbeat view on the economy. The Reserve Bank certainly has no need to act on the easing bias by cutting interest rates.

What do the figures show?

Reserve Bank Governor Speech

Reserve Bank Governor Glenn Stevens delivered a speech “The Path to Prosperity”

On interest rates: “were a change to monetary policy to be required in the near term, it would almost certainly be an easing, not a tightening.”

On higher mortgage rates announced by banks: “my preliminary assessment is that the macroeconomic effect of these actions in themselves may not be large. It is one part of a much bigger and evolving landscape. Nonetheless, the Reserve Bank Board will keep this matter, and that broader landscape, under careful review.” 

Reserve Bank gives view on rates: Craig James
Impact of higher mortgage rates on sentiment: “Could the ‘shock’ value of the rises in mortgage rates itself lead to a significant change in that trend, gentle as it is, of improvement? While such an outcome is perhaps conceivable, given the starting point and all the above considerations, it seems to me a bit of a leap to draw that conclusion.”

Quantifying impact of bank home rate changes: “Measuring across the total loan book, the recent actions are the equivalent of roughly half of one 25 basis point monetary policy change. They take back perhaps a quarter of the extent of interest rate easing seen since the start of this year, and a smaller proportion of the total easing in lending costs seen over the past two years.”

Reserve Bank distances itself from bank rate hikes: “Let me be clear that in making these comments I am not offering an endorsement of the banks' actions. Nor should an assumption that shareholder returns must not decline as a result of the effects of supervisory measures, or any other factor, simply be accepted without question. The ‘right’ rate of return for bank shareholders is, as others have observed, an open question. It is not a constant of the universe.”

On the Federal Budget: “The need for medium-term budget repair also remains. Here also progress has been made, and the budget deficit at present still compares favourably with what we see in many other countries. But my sense is that a fair bit of the necessary national conversation about how we pay for all the things we have voted for lies ahead. This doesn't imply a need for radical immediate action, but I suspect it does mean an unusually long period of tight budget discipline on recurrent spending is likely to be required.”

New vehicle sales

According to the Federal Chamber of Automotive Industries (FCAI), Australian new motor vehicle sales totalled 94,321 in October, up 3.4% over the year. In the year to October 2015 a record 1,146,194 new vehicles were sold.

Passenger vehicles in October were down 5.3% on a year earlier with heavy commercial vehicles down by 8.3% and light commercial vehicles were down by 1.9%. Sales of sports utility vehicles (SUVs) were up by 20.5% (small SUVs up 37%).

In the year to October, SUVs represented 43.5% of combined passenger car and SUV sales. SUVs accounted for a record 34.8% of all vehicle sales in the year to October.

What is the importance of the economic data?

The Federal Chamber of Automotive Industries releases estimates of car sales on the third business day of the month. The figures highlight the strength of consumer spending as well as conditions facing auto & components companies. 

What are the implications for interest rates and investors?

The Reserve Bank has made it clear that monetary policy has an “easing bias” meaning that if rates were to change, it would be down. But with the Reserve Bank seemingly more positive on economic prospects, there are no signs that the Reserve Bank will draw on the insurance policy to actually lower rates. 

CommSec expects the Reserve Bank to remain on the interest rate sidelines over the coming year.

The continued strength of new car sales highlights the underlying strength of consumer spending. It is not out of the question that more SUVs will be sold in coming years than passenger cars.


Reserve Bank gives view on rates: Craig James
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.

Interest Rates

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