Don’t expect interest rates to go up any time soon but, equally, don’t expect them to go down – that was the clear message from the Reserve Bank today.
In unusually direct language, RBA Governor Glenn Stevens has moved to lay to rest interest rate speculation for the next few months, saying the most prudent course for the central bank to take was likely to be “a period of stability in interest rates”.
That is central bank speak for everyone – those predicting imminent rate rises, and those calling for rate cuts – to take a Bex and calm down.
As mortgage holders ponder the pros and cons of fixing part of their loan, and investors do their credit sums, the Reserve Bank has tried to give some reassurance by flagging official rates are not likely to move for some time yet.
As widely tipped, the RBA has decided to hold the official cash rate at 2.5 per cent this month.
What many may not have anticipated though, was the central bank’s unusual willingness to flag its interest rate intentions.
Following the Reserve Bank Board’s first meeting for 2014, Mr Stevens released a statement that showed the RBA is in no rush to change its policy settings.
“On present indications, the most prudent course is likely to be a period of stability in interest rates,” he said.
The Reserve Bank sees no compelling reasons yet for either a rate increase, or a rate cut.
Unexpectedly strong inflation growth in the December quarter (underlying inflation grew by 0.9 per cent to be up 2.6 per cent from a year earlier), along with the falling exchange rate and increased housing activity, had prompted some to speculate that the RBA would soon have to consider raising the c ash rate.
But while Governor Stevens admitted monetary policy was “accommodative”, interest rates were “very low”, and house prices have surged, there was as no yet sign of a dangerous build up in indebtedness. In fact, household credit growth is moderate.
On inflation, the central bank so far does not seem to be phased by the jump in prices in December, some of which it attributed to importers and retailers quickly passing through to consumers much of the increase in costs caused by the easing exchange rate.
Mr Stevens said that although inflation was stronger than the central bank had predicted when it released its most recent Statement on Monetary Policy late last year, it was “still consistent with the 2 to 3 per cent target over the next two years”.
Those arguing the case for a rate cut have pointed to the nation’s anaemic growth rate (2.3 per cent in the 12 months to the September quarter 2013), a plunge in mining investment and weak labour market (the economy shed almost 32,000 full-time jobs in December and the unemployment rate is expected to rise above its current 5.8 per cent) to show the need for more support for activity.
But to this line of argument, Mr Stevens said monetary policy was “appropriately configured” to foster growth in demand (ie don’t expect them to go any lower).
Of course, the RBA might be considering the possibility (raised by Deloitte Access Economics director Chris Richardson) that commercial banks will lower their lending rates as they secure cheaper sources of funding on international markets. The Governor’s statement gives no hint on this front, except to say that long-term interest rates and risk spreads remain low, and there is adequate funding available through credit and equity markets.
As the economy gropes toward sources of growth to replace the sugar hit from resources investment, conditions are likely to stay rocky and uncertain.
In this shifting economic environment the RBA has moved to provide consumers and investors with one welcome point of consistency, at least for the next few months.
Tag Archives: central bank
RBA locks in 2.5 per cent cash rate – for now
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No more rate cuts, but no rush to tighten yet
Interest rates look set to head higher, but the RBA’s “considerable uncertainty” about the pace of recovery in much of the economy means the first rate hike of the cycle could be delayed until well into 2014.
In a widely-anticipated decision, the RBA Board has decided to hold the cash rate at 2.5 per cent – meaning it will have been at this historically low level for six months by the time of the Board’s next meeting on February 4.
There is clear evidence that low interest rates are having an effect.
The property market is strengthening (house prices have risen, building approvals are up 23 per cent from a year ago), company profits are growing (up almost 9 per cent in 12 months), shares are rising (up 20 per cent in the year to date), and retail sales are increasing at a sustained solid clip (three consecutive monthly increases of 0.5 per cent or greater).
And the central bank thinks there is more of such news to come.
As RBA Governor Glenn Stevens put it today, “The full effects of these decisions [to ease monetary policy] are still coming through, and will be for a while yet”.
This is coupled with tentative signs that activity in the non-mining parts of the economy is picking up.
Official capital expenditure data showed manufacturers and other businesses were gradually increasing their investment, and the latest report from credit reporting firm Dun & Bradstreet showed 10 per cent of firms intend to hire extra staff in the first quarter of 2014.
If this is accurate, and businesses act on their hiring intentions, the unemployment rate may not rise much higher.
In further promising news, the official GDP numbers for the September quarter, due out tomorrow, may also be a bit stronger than many have been predicting.
The Australian Bureau of Statistics threw in a surprise today with its report that the trade surplus surged more than 50 per cent in three months to almost $9 billion, adding around 0.7 of a percentage point to activity in the September quarter.
The RBA’s known unknowns: the dollar and non-mining activity
But the persistently strong dollar and the sputtering recovery in economic activity outside the mining sector are the two greatest areas of uncertainty for the Reserve Bank.
Continuing recent efforts to talk the currency down, Stevens said the dollar (which was trading at just below US91 cents following the RBA announcement) was “still uncomfortably high”.
He almost didn’t need to add that the high exchange rate will have to come down in order for the economy to achieve “balanced” growth.
On this front, the Governor admitted that expectations for an acceleration in activity outside the mining sector were subject to “considerable uncertainty”.
Market Economics managing director Stephen Koukoulas is one of the few who for some time now have been predicting rates to rise in 2014 – he tips in the first three months of next year.
But the strong dollar could make it hesitate.
Koukoulas, for one, thinks there is much more the RBA needs to do much more to get the currency down – jawboning alone has had little effect.
If he is right, look for big sell-offs of the currency in coming days.
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A good week for the RBA
Every now and then you have a week when things seem to go right – your baby son suddenly begins sleeping soundly and copiously, you get the perfect park at work – twice! – and your bank gets in touch to say it has made a $100 mistake in your favour, and lets you keep it (ok, so that last one never happens, it is just a dream).
The Reserve Bank of Australia has just had such a week.
When the RBA Board sits down tomorrow for its monthly monetary policy meeting, it will see little reason to move the official cash rate.
All the signs are that the economy is behaving in ways that it has anticipated, and that are broadly in keeping with its monetary policy stance.
Low interest rates appear to be working to encourage activity in non-mining parts of the economy, particularly housing, while the dollar is depreciating and worrying price pressures are yet to appear.
Though there was a slip in building approvals last month (down 1.8 per cent), much of this was due to the volatile apartments segment of the market, and annual growth remains a healthy 23.1 per cent.
Of course, holding interest rates at historically low levels for an extended period carries with it risk, and some have started to fret that a bubble in the housing market, particularly in Sydney, is developing.
But the overblown talk of an over-heating property market, never well-founded, looks increasingly silly. Sure, house prices have surged in the major cities – most notably Sydney and Melbourne – but there are at least three good reasons to dismiss talk of a bubble at this stage. Firstly, there are signs that the market in established housing is losing some of its heat and price growth is easing. Secondly, and perhaps most importantly, credit growth remains modest – borrowing for housing grew by 0.5 per cent in each of September and October to be up 5 per cent from a year earlier, which is hardly what could be described as “bubble-like”. Thirdly, the nation’s population is growing at a solid rate of around 1.8 per cent, and the easing dollar makes Australian property an increasingly attractive proposition for foreign investors.
There are also encouraging signs that manufacturers and other businesses are starting to pick up the pace of their investment – a development that is coming none too soon, given the rapid deceleration in mining investment.
Official figures show that in the September quarter, mining companies cut their spending on plant and equipment by 7.1 per cent (while expenditure on buildings and structures increased 5.6 per cent). In the same period, manufacturers spent an extra 3 per cent on plant and equipment, and increased funds for buildings by 1.5 per cent.
Any investment plans should be well supported by healthy balance sheets. The Australian Bureau of Statistics confirmed today that business profits grew almost 4 per cent in the September quarter and are up almost 9 per cent in the past year. In the same period, wages have grown 3.1 per cent.
While GDP figures out on Wednesday are likely to show the economy was just ticking over in the September quarter, evidence that non-mining activity is building should push consideration of more rate cuts further into the background.
Instead, the RBA Board may soon begin to consider the timing of a rate hike.
Though it is unlikely to make such a move tomorrow, the central bank will be heartened by the dollar’s slide in recent days. Governor Glenn Stevens made it clear again last week that he thought its sustained strength against the greenback has been increasingly difficult to justify.
Inflation and wages appear well contained for now, but the longer the cash rate is kept at 2.5 per cent, the greater the risk prices could accelerate, which would in turn increase pressure for wage hikes.
As ever for a central bank, the trick is in the timing. Push up rates too soon or too fast, and the dollar could rebound, but leave them low for too long and potentially destabilising price pressures could accumulate.
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Forget fuel spike – tame underlying inflation means no price fears for RBA
A surge in the cost of fuel (up 7.6 per cent) helped drive a 1.2 per cent spike in headline inflation in the September quarter.
But if you want a clue to what the Reserve Bank of Australia will make of the Consumer Price Index, focus on the measures of underlying inflation, when the quarterly rise was a more moderate 0.65 per cent.
As a result, underlying inflation is sitting around 2.3 per cent – virtually bang on the RBA’s forecast.
There are a few things for the central bank to keep an eye on.
One is the growth in house prices as the long-awaited recovery in the housing market gathers pace. While slow wages growth may help constrain inflation in real estate, the RBA will be increasingly alert as time goes on to the risk (remote for now) that if interest rates are kept low for too long they could fuel risky borrowing. But this is a problem that is a long way off. Economics conditions are still too soft for there to be talk of a rate rise just yet.
The other main factor is the lower exchange rate, and the effect that has had on push up the cost of imports.
If, as expected, the US recovery gradually reasserts itself after the debt ceiling madness of recent days, the dollar is likely to slide further.
Overall, there is little in the Consumer Price Index numbers that is unexpected, making a November interest rate move no more or less likely.
The behaviour of inflation has caused little concern for the central bank for some time now.
In its most recent forecasts, released in August, the RBA stuck by the outlook it outlined earlier in the year – underlying inflation to hover around 2.25 per cent (in the lower half of its 2 to 3 per cent target band) through to the middle of next year, and gradually rise to around 2.5 per cent thereafter.
It bases its benign outlook on its belief that all the forces acting on prices – some to force them up, some to force them down – collectively cancel each other out.
One of the big positives for households in recent years has been the strength of the currency, which has made imports (particularly clothes, electronics, cars etc) extraordinarily cheap and affordable.
But the dollar’s fall against the US currency in recent months (notwithstanding burst in dollar strength in the last couple of weeks), has seen this boost to household spending power fade.
So, if this was happening in isolation, the effect would be to force prices up.
But softness in the domestic economy, which has seen both economic activity and wages growth slow, means retailers risk quickly losing customers if they push up their prices too fast.
In the RBA’s judgement, the net effect of these opposing forces (a weaker dollar forcing the cost of imports up while a softening labour market and slower wages growth holds back consumer spending) on inflation will be negligible.
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Outlier 