RBA have no urgency to start raising rates

RBA have no urgency to start raising rates
RBA have no urgency to start raising rates

The RBA left interest rates on hold again for the 16th month in a row following its November Board meeting and its post meeting statement provided no urgency to start raising rates.

As has been the case for some time now the RBA expects growth to pick up to around 3% or just above over the next few years – and is getting more confident that a pick up in non-mining investment and increased infrastructure spending will help on this front – and it sees stronger growth along with continuing labour market strength driving an eventual pick up in wages growth and inflation.

However, for now it remains in wait and see mode thanks to uncertainty hanging over the outlook for consumer spending and wages growth and inflation remaining low. At the same the RBA continues to warn that a stronger $A would likely result in slower growth and inflation than forecast and worries about the overheated Sydney and Melbourne property markets have receded with national home prices flat over the last six months. 

While some express surprise that the RBA isn’t following the US Federal Reserve in its interest rate tightening cycle, it’s worth noting that the RBA sets rates on the basis of Australian conditions so there is no automatic linkage from the Fed to RBA on rates.

In fact, ever since the GFC we have diverged – raising rates in 2009-10 when the Fed held rates at zero and cutting rates last year when the Fed had started to hike. While a tightening Fed in the year ahead and an on hold RBA are likely to contribute to a fall in the value of the Australian dollar, given weak inflationary pressures and some uncertainty around growth this would be a desirable development and so wouldn’t prompt an RBA move unless the $A crashed causing a surge in inflation (which looks unlikely).

Given all this, we remain of the view that the RBA won’t start raising interest rates until late next year at the earliest.

SHANE OLIVER is head of investment strategy and economics and chief economist at AMP Capital and is responsible for AMP Capital's diversified investment funds.

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Rba Rate Decision Shane Oliver

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