It is now a year since the Reserve Bank of Australia Board cut the official cash rate to a historically-low 2.5 per cent, in which time the economy has been flat out trying to hold its ground, let alone take off.
And, the RBA’s analysis suggests, that is unlikely to change any time soon.
In his brief statement announcement the outcome of the Board meeting, Reserve Bank Governor Glenn Stevens said he expected growth to be “a little below trend [around 3 per cent] over the year ahead”.
Put this together the RBA’s view that inflation will remain consistent with the central bank’s 2 to 3 per cent target in the next two years – even if the dollar goes lower – and it suggests interest rates are not going anywhere for quite some time.
But if the prospect of an extended period of very low interest rates has borrowers excited, the reasons why this is likely to be the case are much less reassuring.
Essentially, the RBA has too keep rates low because of economic weakness.
The list of negatives dragging on growth is long, while the index of positives is depressingly brief.
On the plus side, all that investment in new and bigger mines, rail and road links and ports is paying off, and the volume of commodity exports surged early this year. The downside is that the massive pipeline of mining investment has virtually run its course.
Consumers are an important source of growth, and here the picture is equally mixed. Low interest rates are working to encourage people to borrow to buy and build homes, and a strong expansion in housing construction is underway (and the overblown hype about a housing bubble has been shown yet again to be a furphy).
In another promising sign, firms outside the resources sector appear to be brushing off investment ideas, though most are to commit money to expansion plans as they weight for evidence of a sustained lift in demand.
And this is where the picture gets murky.
One of the reasons the RBA is comfortable holding interest rates so low is that wages are going nowhere. In the year to the March quarter, the Australian Bureau of Statistics’ wage price index grew around 2.7 per cent. Over the same period, the headline consumer price index climbed 3 per cent, and even underlying inflation grew more strongly. In essence, household income is slipping behind the rise in living costs.
That is not good news for retailers keen to bump up prices and margins, and it is not likely to get much better for a while.
In the current economic environment, where the unemployment rate sits at 6 per cent and, according to Glenn Stevens, is likely to stay there for “some time yet”, workers have limited bargaining power to push for a pay rise.
Add to this the blow to jobs, investment and confidence delivered by the Federal Budget – and compounded by the political uncertainty as to what will actually be passed by the Senate – and it is not an inspiring outlook.
No wonder that the RBA and the financial markets believe interest rates are not going anywhere for quite some time.