RBA hints at another cut in rates as growth falters
A statement on monetary policy, released on Friday, shows the central bank has slightly reduced its forecast for economic growth for this year, with unemployment expected to drift gradually higher. The comments follow the Reserve this week keeping official cash rates at a 3½-year low of 3 per cent.
The RBA also damped mortgage holders' hopes that variable mortgagee rates would fall independently of further official cuts to the cash rate, given recent falls in bank wholesale funding costs were expected to "take some time" to filter through to overall bank funding costs.
As well, competition for domestic deposits remained high, it said.
While the average interest rate on the big banks' short-term deposits had fallen about 25 basis points in the past three months, roughly in line with the cash rate, the interest rates for longer-term deposits eased about 10 basis points as banks fought to keep customers, the RBA noted.
The observations came as ANZ said it would keep its variable mortgage interest rates on hold at 6.4 per cent in its first review of the year.
The Australian Bankers Association's chief executive, Steve Munchenburg, said it would take a long time before any improvements in wholesale funding improved the overall funding situation. "It's certainly way too early to talk about what the banks might do," he said. Mortgages were already at near-record lows.
The Australian dollar, which weakened against major currencies this week, was sold off a further 20 basis points on Friday to a low of $US1.0256 after the RBA's statement was released. By close it had clawed its way back to $US1.0288 on solid Chinese exports data.
Even so, the historically high exchange rate has been helping to contain inflation within the RBA's target band of 2-3 per cent.
Economists said the statement showed another rate cut was on the cards.
"The RBA has downgraded its economic growth outlook to a greater extent than we expected, as it continues to see inflation as remaining consistent with its target," Alvin Pontoh, TD Securities' Asia-Pacific macro strategist, said. "This combination gives substance to RBA's comments on Tuesday that 'the inflation outlook affords scope for further easing if judged necessary', leaving the door wide open for a rate cut."
In preparing its domestic forecasts, the RBA assumed the exchange rate would remain around $US1.03, and Brent oil would remain at $US113 a barrel. It also assumed the cash rate would be unchanged over the rest of the forecast period, at 3 per cent, following the 25 basis points cut in December.
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The RBA’s statement downgraded its growth outlook while saying inflation remains consistent with its 2–3% target, leaving scope for further easing if needed. Economists quoted in the article said that combination makes another RBA rate cut likely.
The article notes the official cash rate has been held at 3% — a three-and-a-half-year low — after a 25 basis point cut in December. The RBA’s recent statement assumed the cash rate would remain at 3% over the rest of its forecast period.
The RBA slightly reduced its forecast for economic growth for the year and said unemployment is expected to drift gradually higher, signalling a more cautious view on the domestic economy.
The RBA warned that recent falls in bank wholesale funding costs are expected to take time to filter through to overall bank funding, so variable mortgage rates are unlikely to fall quickly on that basis alone. The article also notes ANZ kept its variable mortgage rate on hold at 6.4% in its first review of the year.
The RBA observed big banks’ short-term deposit rates had fallen about 25 basis points over the past three months (roughly in line with the cash rate), while longer-term deposit rates eased about 10 basis points as banks competed to keep customers. That means savers have seen some rate decline, especially on short-term deposits.
The Australian dollar weakened to about US$1.0256 after the RBA statement before recovering to roughly US$1.0288 on solid Chinese export data. The article points out the historically high exchange rate has helped contain inflation within the RBA’s 2–3% target band.
When preparing forecasts the RBA assumed the exchange rate would remain around US$1.03, Brent oil would stay at US$113 a barrel, and that the cash rate would be unchanged at 3% for the rest of the forecast period following the December cut.
The Australian Bankers Association’s CEO Steve Munchenburg said it will take a long time before any improvements in wholesale funding translate into a better overall funding situation for banks. That cautions against expecting immediate declines in mortgage or deposit rates despite some wholesale cost falls.
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