Reserve Bank softens its views on the economy: Craig James

GUEST OBSERVER

 

The Australian economy is very much a Curate’s egg at present – it is good in parts. Manufacturing is doing well and business conditions generally are favourable.

 

But consumers are more cautious. Retail spending is soft while job markets are mixed, as are housing markets. So as you would expect the Reserve Bank is a little more considered when discussing the position of the Australian economy.

But the Reserve Bank is by no means downcast, rather it is probably a little disappointed that the economy is largely marking time.

The Reserve Bank sets policy by looking at where inflation is going to go. Inflation is still tipped to move above 2 per cent so clearly the Bank won’t be cutting rates any time soon.

Housing has dominated the commentary. The Reserve Bank has added its voice to the need for lenders to be careful in assessing the serviceability of loans. And the Bank believes it would be positive if there was less reliance on interest only loans for home purchase.

Perspectives on interest rates

 

The Reserve Bank has left the cash rate at 1.50 percent. The previous move was a rate cut in August 2016 (25 basis points). There have now been 12 rate cuts since November 2011, with the Reserve Bank cutting rates from 4.75 percent to 1.50 percent.

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 per cent to 4.75 per cent.

What are the implications of today’s decision?

 

The next move in interest rates is still more likely to be a rate hike than a rate cut. But in our view, policy is unlikely to change over 2017, so any rate hike is some way off.

 

The Reserve Bank believes inflation will push into the 2-3 per cent target band. And economic growth is expected to lift over the year. Add in the fact that home prices are recording solid gains in many capital cities and it seems clear that rate cuts are off the agenda.

 

Then there is the global environment. Global economic growth has improved and deflationary risks have receded. The US is lifting interest rates. And there are early signs that the Euro zone will reduce stimulus later this year. So the global environment supports the domestic policy leaning.

The Reserve Bank is expected to maintain its neutral  policy stance for now. Inflation is still low, economic indicators are more mixed and the higher Australian dollar is acting as a modest cap on economic growth.