Craig James – Chief Economist (Author)

– The cash rate has been left at a record low of 2.00 per cent. The Reserve Bank hasn’t provided any guidance on future interest rate changes.

What does it all mean?

– We are now at an interesting juncture. Nine economists believe that the Reserve Bank will cut rates again. Eight economists believe that interest rates have bottomed and will rise in the next 15 months, with one tipping the first move in February or March next year. The remainder of the 23 economists surveyed believe that the cash rate is likely to remain unchanged for an extended period.

– Meanwhile, the Reserve Bank again hasn’t declared its interest rate preferences. On cutting rates in May, the Reserve Bank decided against providing any guidance on the next move. That was part of a clear strategy to stop borrowers sitting on the sidelines in the hope that rates would fall even lower. And the lack of interest rate bias (the neutral stance) is again a feature of the June statement – rightfully in our opinion.

– We suspect that the Reserve Bank has a shopping list of factors that it wants to tick off before deciding the next move in rates. Some of the factors include: Wednesday’s economic growth data; the Greek debt negotiations; evidence that small businesses are embracing stimulus measures; and possibly the next investment data in three months’ time.

– On the latest investment data, the Reserve Bank hasn’t added to its views from the May meeting: “a key drag on private demand is weakness in business capital expenditure in both the mining and non-mining sectors and this is likely to persist over the coming year.”

– On home prices, the Reserve Bank hasn’t changed its rhetoric, it believes the so-called housing boom is a Sydney story. “Dwelling prices continue to rise strongly in Sydney, though trends have been more varied in a number of other cities.”

– On the Australian dollar, the Reserve Bank’s comments are exactly the same as the May statement – it believes that further depreciation against the US dollar “seems both likely and necessary”.

Perspectives on interest rates

– The previous rate cut was in May 2015 (25 basis points), taking the cash rate to a record low of 2.00 per cent.

– There have been 10 rate cuts since November 2011.

– 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?

– Borrowers have even more reason to question whether rates have bottomed. Despite some weak investment data (albeit old data, predating the May rate cut and budget stimulus) the Reserve Bank has decided against providing an explicit interest rate bias or leaning. The hope is that businesses will now start to embrace the stimulus on offer, fearing that if they don’t, they will miss out on super-low rates.

 

– On the negative side, the fear of missing out could prompt some more marginal borrowers to buy property or other assets. The hope is that banks and regulators are diligent in credit analysis at this point in the interest rate cycle.

Comparing the two most recent statements

– The statement from the May 2015 meeting is on the left; the statement from today’s June 2015 meeting is on the right. Emphasis has been added to significant changes in the wording in the statements.

Media Release

No: 2015-08

Date: 5 May 2015

Embargo: For Immediate Release

Statement by Glenn Stevens, Governor: Monetary Policy Decision

At its meeting today, the Board decided to lower the cash rate by 25 basis points to 2.0 per cent, effective 6 May 2015.

The global economy is expanding at a moderate pace, but commodity prices have declined over the past year, in some cases sharply. These trends appear largely to reflect increased supply, including from Australia. Australia’s terms of trade are falling nonetheless.

The Federal Reserve is expected to start increasing its policy rate later this year, but some other major central banks are stepping up the pace of unconventional policy measures. Hence, financial conditions remain very accommodative globally, with long-term borrowing rates for sovereigns and creditworthy private borrowers remarkably low.

In Australia, the available information suggests improved trends in household demand over the past six months and stronger growth in employment.

Looking ahead, the key drag on private demand is likely to be weakness in business capital expenditure in both the mining and non-mining sectors over the coming year. Public spending is also scheduled to be subdued. The economy is therefore likely to be operating with a degree of spare capacity for some time yet. Inflation is forecast to remain consistent with the target over the next one to two years, even with a lower exchange rate.

Low interest rates are acting to support borrowing and spending, and credit is recording moderate growth overall, with stronger lending to businesses of late. Growth in lending to the housing market has been steady over recent months. Dwelling prices continue to rise strongly in Sydney, though trends have been more varied in a number of other cities. The Bank is working with other regulators to assess and contain risks that may arise from the housing market. In other asset markets, prices for equities and commercial property have been supported by lower long-term interest rates.

The Australian dollar has declined noticeably against a rising US dollar over the past year, though less so against a basket of currencies. Further depreciation seems both likely and necessary, particularly given the significant declines in key commodity prices.

At today’s meeting, the Board judged that the inflation outlook provided the opportunity for monetary policy to be eased further, so as to reinforce recent encouraging trends in household demand.

Media Release

No: 2015-09

Date: 2 June 2015

Embargo: For Immediate Release

Statement by Glenn Stevens, Governor: Monetary Policy Decision

At its meeting today, the Board decided to leave the cash rate unchanged at 2.0 per cent.

The global economy is expanding at a moderate pace, but some key commodity prices are much lower than a year ago. This trend appears largely to reflect increased supply, including from Australia. Australia’s terms of trade are falling nonetheless.

The Federal Reserve is expected to start increasing its policy rate later this year, but some other major central banks are continuing to ease policy. Hence, global financial conditions remain very accommodative. Despite some increases in bond yields recently, long-term borrowing rates for sovereigns and creditworthy private borrowers remain remarkably low.

In Australia, the available information suggests the economy has continued to grow, but at a rate somewhat below its longer-term average. Household spending has improved, including a large rise in dwelling construction, and exports are rising. But a key drag on private demand is weakness in business capital expenditure in both the mining and non-mining sectors and this is likely to persist over the coming year. Public spending is also scheduled to be subdued. Overall, the economy is likely to be operating with a degree of spare capacity for some time yet. With very slow growth in labour costs, inflation is forecast to remain consistent with the target over the next one to two years, even with a lower exchange rate.

In such circumstances, monetary policy needs to be accommodative. Low interest rates are acting to support borrowing and spending. Credit is recording moderate growth overall, with stronger lending to businesses and growth in lending to the housing market broadly steady over recent months. Dwelling prices continue to rise strongly in Sydney, though trends have been more varied in a number of other cities. The Bank is working with other regulators to assess and contain risks that may arise from the housing market. In other asset markets, prices for equities and commercial property have been supported by lower long-term interest rates.

The Australian dollar has declined noticeably against a rising US dollar over the past year, though less so against a basket of currencies. Further depreciation seems both likely and necessary, particularly given the significant declines in key commodity prices.

Having eased monetary policy last month, the Board today judged that leaving the cash rate unchanged was appropriate at this meeting.

Information on economic and financial conditions to be received over the period ahead will inform the Board’s assessment of the outlook and hence whether the current stance of policy will most effectively foster sustainable growth and inflation consistent with the target.