Reserve Bank keeps rates at record lows: CommSec's Craig James
GUEST OBSERVER
The cash rate has been left at a record low of 2.00 percent for a 10th month (11 months of rates at 2 percent).
The Reserve Bank Board has not adjusted commentary on the Australian dollar, implicitly signalling that the currency is broadly where it should be. The real trade weighted index is near 6-year lows.
What does it all mean?
The Reserve Bank adopted a ‘conditional easing bias’ in November 2015. That is, the Reserve Bank indicated at the time that scope existed for lower interest rates “should that be appropriate to lend support to demand.” But while the Reserve Bank has indicated that rate cuts are more likely than rate hikes, it is no closer to acting on that bias. In fact, the more likely situation is one where interest rates remain on hold for a prolonged period.
It’s not hard to work out why stable rates are the preferred course of action. In simple terms, the economy is doing OK and doesn’t need a kick along. Clearly the economy could be doing better and the Reserve Bank would be hoping that its forecast for stronger growth proves to be right. But it is by no means becalmed.
Dwelling starts are at record highs, so are car sales, so are tourism numbers. And while there has been some easing of home
demand in Sydney, Melbourne remains strong and other cities are recording stronger conditions. Hobart home prices are rising at the fastest annual rate in 5ó years.
The housing market had been a source of angst for the Reserve Bank. But conditions are becoming more balanced across cities and regions.
The Reserve Bank has maintained its positive commentary on the Australian economy and its cautious view of the global economy. “…the available information suggests that the expansion in the non-mining parts of the economy strengthened during 2015 despite the contraction in spending in mining investment.”
Is the Reserve Bank worried about the recent lift in the Australian dollar? Not in the least. The commentary on the Aussie was brief: “The exchange rate has been adjusting to the evolving economic outlook.”
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 per cent.
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 percent to 4.75 percent.
What are the implications of today’s decision?
CommSec doesn’t expect any change in the cash rate for the foreseeable future. Underlying inflation remains at the bottom of the 2-3 percent target band but should lift over 2016 as import prices gradually lift in response to a weaker exchange rate.
Craig James is the chief economist at CommSec.