Look both ways on interest rates

A lot depends on the Australian dollar and continuing global economic recovery. The Reserve's statement suggests the bank's next policy move could be up or down.

There were no surprises at the Reserve Bank board meeting, with rates remaining at a historically low level. The next move in rates could be determined by the Australian dollar, with the governor again noting that it was uncomfortably high.

 At its meeting on Cup Day, the board decided to leave the cash rate unchanged at 2.5 per cent. It was the first time since 2005 that the meeting was not considered ‘live’, with little doubt about the outcome.

The tone of the statement suggests that the bank is currently neutral on the next policy move. It could be up or down, with a lot depending on whether the dollar can depreciate and support a sustainable recovery in the non-mining sector.

In terms of data there was very little that changed since the last meeting on October 1. The Reserve Bank said that the Australian economy has been growing at a bit below trend over the past year and this will likely persist in the near term as the economy adjusts to weaker mining investment. Improving indicators of household and business sentiment provide some optimism for the non-mining sector, particularly after the higher than expected retail sales in the September quarter (Shopping for sustainable consumption growth, November 4). But it is too soon to judge how persistent that will be.

Further out, the Reserve believes that private demand in the non-mining sector will pick up, but admits that there is considerable uncertainty surrounding that outlook. A lot will depend on the Australian dollar and a recovery in the global economy.

Stevens reiterated his comments from last week (The RBA’s rebalancing act rests on Fed action, October 29) that the Australian dollar, despite being lower than earlier in the year, is still uncomfortably high. The Australian dollar has appreciated almost 1 per cent against both the US dollar and the trade weighted index since the last board meeting, but is still down almost 8 per cent against the US dollar since April 2013.

Governor Glenn Stevens said that inflation has been “consistent with the medium-term target” but I believe there should be some concern regarding the pick-up in inflation over the past six months. However, with wage growth moderating the recent rise in inflation may prove an aberration.

Housing and equity markets have strengthened further over October but Stevens said that the pace of borrowing has remained relatively subdued overall to date. Household lending has picked up a bit in recent months but business lending remains very weak. On Monday and Tuesday next week the ABS releases Housing Finance and Lending Finance which will provide a bit more detail on lending to households and businesses in September.

Given the neutral tone of the statement is seems unlikely that any move will be made at the December meeting. Loose monetary policy from the United States will continue to support the Australian dollar and the Reserve will be reluctant to make a move in December given the policy uncertainty with the Fed. The Federal Reserve does not meet again until December 17-18, well after the last RBA board meeting of 2013.  

With the board meeting out the way our attention is directed towards Thursday’s Labour Force survey, which will provide an early read on economic conditions in the December quarter. Economists are predicting the unemployment rate to tick down to 5.7 per cent from 5.8 per cent in September. Though not typically a high profile release, international trade data, released by the ABS on Wednesday, will give some indication on whether the surprising strength in consumption in the September quarter reflected imports or domestic production.