An “extended period of low interest rates”
Reserve Bank Board meeting

The Reserve Bank has left the cash rate at a record low of 1.00 per cent. The Reserve Bank previously cut rates in both June and July, each time by 25 basis points or a quarter of a per cent.

What has changed since the last meeting?

• The US-China trade war has intensified.

• The International Monetary Fund revised its 2019 estimate for global growth from 3.3 per cent to 3.2 per cent.

• The US Federal Reserve cut the federal funds rate by 25 basis points.

• The Australian jobless rate was steady at 5.2 per cent in June.

• Job ads rose 0.8 per cent in July after a 4.6 per cent increase in June (the biggest monthly gain in 18 months).

• Capital city home prices rose by 0.1 per cent in July – the biggest rise in almost two years.

• Private sector credit rose by just 0.1 per cent in June. Annual credit growth is 3.3 per cent – a 5½-year low.

• Retail trade rose by 0.4 per cent in June.

• In real terms retail trade rose 0.2 per cent in the June quarter after falling 0.1 per cent in the March quarter.

• The Consumer Price Index rose 0.6 per cent in the June quarter to be up 1.6 per cent on the year.

• Both the All Ordinaries and ASX200 share indexes hit record highs.

• The Australian dollar has held around US67-69 cents.
The assessment

• Reserve Bank policymakers have again left the door open to further rate cuts “if needed” – the latter two words also being used in the July interest rate decision. The Reserve Bank hopes it has done enough so it is not called on to cut rates again. But the Bank has made it clear that even if rates aren’t cut, that rates will stay low for an “extended period”. Inflation is not expected to be in the 2-3 per cent target band until 2021.

• The Reserve Bank releases its quarterly Statement on Monetary Policy on Friday. And the Reserve Bank Governor delivers testimony to Parliamentarians on the same day.

Perspectives on interest rates

• In July the Reserve Bank Board cut the cash rate by 25 basis points (quarter of a per cent) to 1.00 per cent after a similar cut in June. There have now been 14 rate cuts since November 2011 with the cash rate cut from 4.75 per cent.

• The Reserve Bank had previously lifted rates seven times from October 2009 to November 2010 from 3.00 per cent to 4.75 per cent.

What are the implications of today’s decision?

• Interest rates are at record lows and the Reserve Bank isn’t expecting to lift rates for some time. At the same time, sharemarkets have become more volatile given the trade war between the US and China. So investors will need to be vigilant. Returns on shares and property still look to outperform other assets classes. But diversification is important in the current environment as is the need to maintain a defensive cash component in portfolios.
Comparing the two most recent statements

• The statement from the July 2019 meeting is on the left; the statement from today’s August 2019 meeting is on the right. Emphasis has been added to highlight key points in the wording in the statements.

Published by Craig James, Chief Economist, CommSec