Businesses may be disappointed by the Reserve Bank’s decision to sit on the official interest rate at 3.5% yesterday, but economists say there is plenty of good news to take away from yesterday’s decision.
In a statement yesterday, RBA governor Glenn Stevens said the board felt that monetary policy was appropriate – and that it already believes the previous rate cuts have helped the Australian economy.
“Dwelling prices have firmed a little over the past couple of months, and business credit has over the past six months recorded its strongest growth for several years,” he said.
ANZ senior economist Justin Fabo told SmartCompany this morning, this particular statement indicates the RBA has kept an eye on the housing market.
“They did mention these interest rate-sensitive parts of the economy are starting to show an impact, and that’s interesting to us.”
“We’re seeing that prices have improved a little and that some of the auction clearance rates have improved as well.”
The RBA even noted that with mortgage rates now at lower than medium-term averages due to its previous rate movements, it felt the current 3.5% was reasonable.
“We’ve thought the RBA has been in a kind of holding pattern for the past few months, after cutting 125 basis points within six months.”
“90 points of that have flowed through to lower mortgage rates, and that’s a reasonably short period of time.”
Other economists noted reasons for joy in yesterday’s announcement. Westpac’s Bill Evans emphasised the RBA’s statement that “Australian banks have had no difficulty in accessing funding”.
CommSec’s Craig James noted retailers actually “have reason to be hopeful”.
“Consumers are starting to spend again, buoyed by an array of stimulus measures. The stimulus effects will gradually wear off but if they are replaced by a lift in consumer confidence, then the recovery in spending can continue.”
In fact, he says that while businesses tend to get excited when the RBA cuts rates, they should be even “more excited” by the fact they didn’t’.
“Inflation is below 2%, unemployment is near 5%, economic growth is the fastest of advanced nations and the federal budget deficit is continuing to contract. There is plenty to inspire confidence.”
The next question is whether the RBA will cut rates through the rest of the year, given inflation is so low. With such a healthy domestic economy, economists say it all depends on what happens in Europe between now and the end of the year.
Fabo says ANZ has already pencilled in 50 basis points’ worth of cuts, but admits an October or November movement is becoming less likely: “Unless we see something happening overseas.”
James thinks more rate cuts are possible, but again, this depends on whether “European officials act with urgency to stabilise financial markets, the US economic recovery gathers pace, the Chinese economy lifts and Aussie consumers maintain confidence to spend, invest and borrow again”.
Bill Evans disagrees, however, saying that while there has been improvement in housing and retail, “the most likely case continues to be that there is adequate scope for further rate cuts”.
