CBA economist Craig James says RBA has given clear message rates have bottomed

RBA Governor Philip Lowe has given a clear message that interest rates have bottomed, implying the central bank won’t be cutting the overnight cash rate anytime soon, according to CBA chief economist Craig James.

At his first speech of the year during the A50 Australian Economic Forum, Governor Lowe said the “bank's central scenario is for some pick-up in economic growth and for inflation to move gradually higher”.  

The RBA is tipping economic growth of 3 per cent over 2017 and 2018. 

On inflation, he said that while it remains low, running at around 11⁄2 per cent in both headline and underlying terms, inflation is not expected to fall further. 

“Instead, our central forecast is for underlying inflation to gradually rise over the next couple of years,” he said. 

Clearly, that signals the bank is not in a hurry to cut rates, says James.

The Governor was also asked about the Aussie dollar, and based on the answer reported by the Financial Review, he also seems happy with current levels. 

"At the moment we think it'll deliver (economic growth of) 3 per cent, which is pretty good. While ever that's the case it's hard to say the exchange rate is fundamentally too high. At the moment I struggle to say the configuration that we have is leading to growth outcomes that are unsatisfactory." 

He also spoke of mixed conditions in the housing and job markets and the challenge in keeping high household debt under control. The Governor also said the RBA was closely monitoring the housing market and household balance sheets. 

He said, “the picture varies widely across the country. Prices for houses in Sydney and Melbourne are rising strongly, but apartment prices in some cities, including Perth and Brisbane have fallen. The population is growing strongly, but there is a large number of additional dwellings to come onto the overall market this year”. 

“Growth in rents is weak, but vacancy rates in most markets are not unusually high. And investor demand looks to have strengthened in the closing months of 2016. So it is a complex picture.”

While saying that high household debts are a risk, he was positive about the tightening of lending standards by banks over the past couple of years.

While upbeat on Australia and Australia’s prospects, the RBA Governor highlighted challenges including lifting productivity growth, greater engagement with Asia, lifting spending on infrastructure and keeping public finances in good shape.

On the unwinding of the mining boom, encouragingly the Governor said “we are already around 90 per cent of the way through the fall from the peak to expected trough in mining investment”. 

His near-term outlook was positive, according to James, though he did say the GDP fall in the September quarter was a surprise, but the economy was expected to have returned to growth in the December quarter.