The RBA decision to leave the cash rate unchanged surprised some economists
The Reserve Bank of Australia chose to leave the official cash rate unchanged at 2.25% yesterday, surprising many economists and traders who were tipping a rate cut.
The Australian dollar jumped 1 cent to $US76.90 following the announcement, while the S&P/ASX 200 benchmark was slightly down at 5926 points at close.
While self-funded retirees would have welcomed the decision to hold, other sectors of the economy were disappointed. Australian Retailers Association executive director Russell Zimmerman said in a statement consumer confidence remains fragile despite a slight increase in the latest official retail sales data.
“Worsening employment figures are also painting a picture of an economy needing monetary support,” Zimmerman said.
“Lowering interest rates … would have been a supportive step in the right direction for the retail sector and jobs but unfortunately this wasn’t the reality.”
University of New South Wales economics professor Tim Harcourt told SmartCompany this morning while there are concerns about the low levels of business confidence and activity, a further easing of monetary policy would not necessarily rectify the situation.
“There’s a view amongst economists that monetary policy is a bit like pushing on a string,” Harcourt says.
“You can keep lowering rates for not much more activity … Business investment and confidence has to come from elsewhere.”
As to whether the Reserve Bank is now more likely to cut the official cash rate next month, Harcourt is doubtful.
“The logic is, if a rate cut wouldn’t have done much this month, it won’t do much next month,” he says.
Instead, Harcourt says businesses should pay more attention to next month’s federal budget, which is already expected to include some form of tax relief for all small businesses.
“I think the heat is now back on the federal government and away from Martin Place [RBA],” Harcourt says.
Nevertheless, Reserve Bank governor Glenn Stevens did provide some insight into how the bank views the shape of the economy in yesterday’s announcement. Here’s the key takeaways from his statement.
Stevens said the information available to the Reserve Bank suggests economic growth is “continuing at a below-trend pace, with overall domestic demand growth quite weak as business capital expenditure falls”.
“As a result, the unemployment rate has gradually moved higher over the past year,” Stevens said.
Given the subdued demand and higher unemployment, Stevens says there is spare capacity in the economy and this will likely continue for “some time yet”.
This also means the rate of inflation will “remain consistent” with the Reserve Bank’s target of between 2-3% over the course of the business cycle over the next one to two years, Stevens said. This is despite a lower currency exchange rate.
Stevens acknowledged the continued strong growth in Australian property prices, especially in Sydney, where “dwelling prices continue to rise strongly”.
But while lending to investors is outpacing lending to owner-occupiers, Stevens said “neither appears to be picking up further at present”.
“Lending to businesses, on the other hand, has been strengthening recently,” he said.
Stevens said the Reserve Bank is working with other regulators to “assess and contain risks that may arise from the housing market”.
Stevens again confirmed the Reserve Bank’s view that a lower exchange rate is needed “to achieve balanced growth in the economy” but stopped short of referring to the Australian dollar as being over-valued, as it has done in the past.
“The Australian dollar has declined noticeably against a rising US dollar over the past year, though less so against a basket of currencies,” Stevens said.
“Further depreciation seems likely, particularly given the significant declines in key commodity prices”.
The Reserve Bank predicts “moderate” growth in the global economy this year, with the “US economy continuing to strengthen, even as China’s growth slows a little from last year’s outcome”.
The Reserve Bank has maintained its stance that further rate cuts are likely.
“Further easing of policy may be appropriate over the period ahead, in order to foster sustainable growth in demand and inflation consistent with the target,” Stevens said.
News Editor
Prior to joining SmartCompany, Eloise was news editor at Books+Publishing, the trade press for the Australian book industry. Eloise has degrees in media and communications, marketing and business management, and political science. You can follow her on Twitter at @ellykeating.
