What has changed since the last Board meeting on March 2?

  • The Australian economy grew by 3.1 per cent in the December quarter after rising 3.4 per cent in the September quarter and contracting 7 per cent in the June quarter. It was the biggest six-month lift in GDP since quarterly records began in 1959.
  • The CoreLogic national home value index surged 2.8 per cent in March – the most since October 1988 – to fresh record highs.
  • The AiGroup Performance of Manufacturing index rose by 1.1 points to a 3-year high of 59.9 points in March.
  • Council approvals to build new homes rose by 21.6 per cent to 19,422 units in February. Approvals are up 20.1 per cent on a year ago.
  • Bureau of Statistics’ job vacancies rose by 13.7 per cent or 34,800 to a record 288,700 available positions in the three months to February. ANZ job ads hit 12-year highs in March.
  • The value of new loan commitments for housing fell by 0.4 per cent from a record high $28.75 billion in January to $28.64 billion in February
  • Retail spending fell by 0.8 per cent in February to be up 9.1 per cent on the year.
  • Private sector credit (effectively outstanding loans) rose by 0.2 per cent in February to be up 1.6 per cent over the year – the weakest annual growth rate in 11 years.
  • Over the March quarter, the US Dow Jones index rose 7.8 per cent; the S&P 500 index rose 5.8 per cent; and the Nasdaq index was up 2.8 per cent. But Aussie shares lagged, with the S&P/ASX200 index up 3.1 per cent.
  • Employment rose by 88,700 in February. The unemployment rate fell from 6.3 per cent to an 11-month low of 5.8 per cent in February.
  • The Aussie dollar has eased from US77-80 cents to US75-77 cents.

The assessment

  • The Reserve Bank Board continues to stress that the preconditions for a higher cash rate won’t be met until 2024 ‘at the earliest’. Having said that, the Reserve Bank remains upbeat about the economic recovery, using the word ‘strong’ three times to describe the economy and home loan demand.
  • As a preview to Friday’s Financial Stability Review, the RBA notes that “Household and business balance sheets are in good shape.”

Perspectives on interest rates

  • The Reserve Bank left the cash rate at 0.10 per cent after cutting the rate from 0.25 per cent on November 3. The RBA previously cut the cash rate on March 3 and March 19, 2020, each by 25 basis points. The target rate for 3-year bond yields was left at 0.10 per cent. On November 3 the RBA cut the 3-year bond target from 0.25 per cent to 0.10 per cent. The RBA implemented the 0.25 per cent target rate for 3-year bond yields on March 19, 2020.

What are the implications of today’s decision?

  • No further stimulus is either warranted or likely. A ‘strong’ economic recovery is underway, led by a solid job market and healthy retail spending. The Reserve Bank remains committed to cash rate of 0.10 per cent until 2024.
  • But, as always, they are risks. And currently the risks are skewed to stronger-than-expected economic outcomes, potentially driving inflation and wages higher. A constant refrain from Aussie business – especially in the housing market – is that costs are rising and it is hard to find staff. While inflationary pressures are largely confined to certain industries and regions, it is important to watch for any spread or broadening of the cost pressures.

Published by Craig James, Chief Economist, CommSec