Rate cuts look a thing of the past now mission is accomplished
Earlier this year the bank was ending each of the monthly reports that follow its board meetings with a statement that, "the inflation outlook as currently assessed may provide some scope for further easing, should that be required to support demand".
Not any more. And not because the inflation could not easily accommodate a further rate cut.
It is because things are turning out as the Reserve Bank hoped they would. The housing market is picking up, just as the bank intended when it started cutting rates. The dollar is much lower (even after the recent lift, it is down 10 per cent in six months). Business and consumer confidence is climbing. And the overseas outlook is more positive than it has been in years, notwithstanding what will most probably be only a short-lived government shutdown in the US.
When you are getting what you want it is wise to give thanks. And not push further.
China, Europe, the US and even Japan are looking better than they did. Overseas measures of business and consumer confidence are lifting, as are the measures at home. While there is not yet the roaring optimism of the pre-global financial crisis days, it is entirely possible it will come. The bank believes that is now more likely than a return of self-fulfilling pessimism.
Sydney home prices are up 10 per cent in the year to date and Melbourne prices are up 7.1 per cent. While to some that is a cause for concern, to the Reserve Bank it is a necessary consequence of its four most recent interest rate cuts working. Housing demand is interest rate sensitive. When it picks up, prices pick up. That is the surest way the bank can tell its cuts are getting traction.
By themselves the higher prices do not worry the bank. If they were associated with lower lending standards or a rush to greater leverage it would be concerned. But there is little evidence they are just yet, and there is unlikely to be evidence for some time. If there are such signs further down the track, the bank might have to push up interest rates, but it is a problem for the future. (And as far as the bank is concerned, it is an easier-to-manage problem than the stagnation it had thought it was facing.)
There will not be any more rate cuts this year, and the way things look right now, there will not be any more next year. Glenn Stevens pointedly reminds us in his governor's statement that the full effects of earlier cuts "are still coming through, and will be for a while yet". The bank's rule of thumb is 18 months. It cut rates in October, December, May and August. Its rule suggests each of those cuts is yet to fully work its way through the system.
Frequently Asked Questions about this Article…
Yes. The article says the Reserve Bank has signalled it is done cutting rates and that there is "scarcely any easing bias left." It states there will not be any more rate cuts this year, and based on how things look now, probably not next year either.
The bank believes its cuts have worked: the housing market is picking up, the Australian dollar is much lower (about 10% down over six months), business and consumer confidence are rising, and the overseas outlook has improved. Those outcomes mean the bank no longer sees a need to push rates lower.
“No easing bias” means the Reserve Bank is no longer inclined to cut interest rates further. For investors, that implies lower likelihood of additional rate-driven stimulus in the near term, while the full effects of previous cuts are still working their way through the economy.
Housing demand has risen and prices have increased markedly: Sydney home prices are reported up 10% year to date and Melbourne prices up 7.1%. The Reserve Bank views those price rises as the expected result of its recent rate cuts.
Potentially. The article says higher prices alone don’t worry the bank, but if they come with lower lending standards or a big jump in household leverage, the bank might have to lift interest rates. At the moment there is little evidence of that risk.
A much lower dollar (around a 10% decline in six months, even after a recent lift) is one of the signs the bank wanted to see. A weaker currency helps support demand and inflation, which reduces the need for further rate cuts.
The bank’s rule of thumb is about 18 months for the full effects of a policy rate change to work through the economy. The article notes cuts were made in October, December, May and August, and those effects are still coming through.
Yes. The article notes China, Europe, the US and Japan are looking better than they have in years, and overseas measures of business and consumer confidence are lifting. That improved global backdrop is helping the Reserve Bank feel less need to cut rates further.
Call 1300 880 160
Start a chat
Schedule a call
