Reserve Bank expects stronger growth and prices: Craig James

Reserve Bank expects stronger growth and prices: Craig James
Reserve Bank expects stronger growth and prices: Craig James

GUEST OBSERVER

The Reserve Bank has left the cash rate at a record low of 1.50 percent for the ninth straight month (eighth meeting).

The Reserve Bank has maintained its “neutral stance” – meaning that rate hikes are as likely as rate cuts in the period ahead.

What does it all mean?

The Reserve Bank Board was seemingly a little downbeat on the economy at the April meeting. Not so at the May meeting.

The Reserve Bank has confirmed that economic growth will strengthen over the next couple of years to above 3 percent – faster than the “speed limit” of just under 3 percent. And inflation will increase as the economy strengthens. In short, don’t expect a cut in official rates.

But while rate cuts are off the agenda, the Reserve Bank is by no means flagging rate hikes. The Reserve Bank Board could have highlighted a lift in “upstream” business inflation, but it stayed silent. So for now the Reserve Bank is happy with where the economy is, and where it is going. 

There also seems a quiet confidence about the outlook for home prices, with the Reserve Bank of the view that the additional supply of apartments coming on stream will rebalance supply with demand in eastern capital cities.

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 percent to 4.75 percent.

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Reserve Bank expects stronger growth and prices: Craig James

What are the implications of today’s decision?

The next move in interest rates is more likely to be a rate hike than a rate cut. But in our view, policy settings are unlikely to change over 2017, so any rate hike is still some way off. The Reserve Bank believes inflation will consolidate in the 2-3 per cent target band. And economic growth is expected to lift over the year.

The forecasts are updated on Friday. Add in the fact that growth rates of home prices are still firm in many capital cities and it is clear that rate cuts are off the agenda.

Then there is the global environment. Global economic growth continues to improve 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. 

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.

Tags: 
Interest Rates Reserve Bank

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