WILL THE RESERVE BANK CUT RATES AGAIN?

http://www.thebull.com.au/articles/a/62953-will-the-reserve-bank-cut-rates-again.html

Craig James| Comm Sec| 3 October 2016

Reserve Bank Board meeting

The Reserve Bank has left the cash rate at a record low of 1.50 per cent. The Reserve Bank is expected to await the September quarter inflation data in late October to decide the next move in rates.

What does it all mean?

Will the Reserve Bank Cut rates again? Reserve Bank Governor Philip Lowe raised doubts on future rate cuts when giving testimony just over a week ago. “The global sense is that monetary policy is not working as effectively as it might have in previous years. I think there are three possible responses to that. The one we have been doing is to just do more monetary policy: if it is not working, do a bit more until it does work. This is why we have found ourselves in some countries with interest rates in negative territory and unprecedented balance sheet expansion. You can keep doing more of something in the hope that it finally works, and my judgement is that that has not been particularly useful.”

So it is now a case of waiting for the inflation data on October 26. Growth in underlying inflation in the quarter would need to be 0.4 per cent or below for the Reserve Bank to discuss cutting rates again.

The Reserve Bank has maintained the neutral policy stance. That means, the Reserve Bank is not leaning in favour of rate cuts or rate hikes. There has been some additional text added to the statement, but nothing substantive. Additional information has been provided on the job market, highlighting the strength of part-time jobs compared with full-time positions. In terms of housing, the RBA does note “Growth in rents is the slowest for some decades.”

Perspectives on interest rates

The Reserve Bank has left the cash rate at 1.50 per cent. The previous rate cut was in August 2016 (25 basis points).

There have now been 12 rate cuts since November 2011, cutting rates from 4.75 per cent to 1.50 per cent.

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?

Investors need to work on the premise that the low inflation/low interest rate world will be around for a while yet. And this is very much a global phenomenon. Consumers can buy goods whenever they want and wherever they are, keeping downward pressure on prices. So yield is still king when investors are assessing alternative financial assets.

Note that Reserve Bank may continue to tolerate a low inflation outcome. Remember that the target band is expressed as a medium-term objective: “Both the Reserve Bank and the Government agree that a flexible medium-term inflation target is the appropriate

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