Broker News

RBA leaves interest rates on hold

By CommSec

Reserve Bank Board meeting

  • The Reserve Bank has left the cash rate at a record low of 1.50 per cent. The Reserve Bank has maintained its “neutral stance” – meaning rate hikes are as likely as rate cuts in the period ahead.

What does it all mean?

There are a number of ‘hot button’ issues to monitor at present: home prices; inflation, the Aussie dollar and the outlook for the US & global economy. So what are the current RBA views? Well, in typical economist parlance, there is a lot of ‘on the one hand this, on the other hand that’. For instance: “conditions in the housing market vary considerably around the country”; “Labour market indicators continue to be mixed”; and “the economy is continuing its transition”.

Importantly though, the Reserve Bank remains positive. The global economy has “improved”; domestic economic growth is forecast around 3 per cent; and headline inflation is tipped to lift to over 2 per cent in 2017. So while the Reserve Bank is sticking with its “neutral stance”, it clearly won’t be cutting rates anytime soon.

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?

If the Reserve Bank was to change rates in coming months, the trigger is more likely to emerge from overseas, probably a development from policies adopted by the new US Government. For instance, stimulatory policies could serve to lift the US, and the broader global economy, in turn boosting inflation. In that event, rate hikes would be more likely in Australia than rate cuts.

Conversely, if the fiscal stimulus doesn’t emerge in the US, rather protectionist actions are advanced, that could serve to restrain global economic growth, stifle inflation pressures and cause Australia’s Reserve Bank to cut rates to protect domestic activity.

Oil prices need to be watched carefully in coming months. If key oil nations continue to comply with new production targets and support oil prices, then deflationary fears will continue to ease.

Fixed-term interest rates have lifted sharply over the past six months. But future moves will be dependent on European elections in 2017 as well as US monetary and fiscal policies. Bank depositors are getting better returns at present, but still returns remain more attractive amongst blue-chip listed companies.

The Reserve Bank will especially watch the following in coming months: US fiscal policy; Chinese economic activity; commodity markets; Australian home prices; inflation expectations; and the local job market.

We expect the Reserve Bank to stay on the interest rate sidelines for the 2017 year.

Published on: Tuesday, February 07, 2017

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