The RBA is still concerned with the rate of inflation in Australia. So much so it has cut the official cash rate by 25bps to a record low 1.50% at its August board meeting. The Bank “judged that prospects for sustainable growth in the economy, with inflation returning to target over time, would be improved by easing monetary policy…” . The move is despite the “moderate pace” of economic growth in Australia and “modest pace of expansion in employment in the near term.”
The Australian dollar initially sold off from 75.4 US cents to 74.9 US cents but over the next few hours it rose and by mid evening it was close to 75.8 US cents, a reaction typical of higher future interest rates rather than lower ones. The reaction in the bond markets was more typical of a cut; 10 year bonds remained unchanged at 1.82% while 3 year bonds dropped 2 bps to record lows of 1.38% with bond yields having steadily dropped in the weeks leading up the decision. However some banks are not passing the lower rate onto mortgage customers and CommSec described this as evidence that the “RBA’s power…has diminished.” The four major banks cut variable rate mortgages between 10bps and 14bps and at the same time either increased term deposit rates or indicated they would increase term deposit rates. The optics of this move look good but the banks are having to hold more liquid assets with new rules coming soon and hence they cannot afford to lose deposits.
The RBA clearly does not seem worried by the ‘housing boom’ reckoning that house price rises have been contained and are not so likely to take off again on the back of this cut. In their words the chances of ultra-low interest rates “exacerbating risks in the housing market has diminished” and there is a “considerable supply of apartments scheduled to come on stream over the next couple of years, particularly in the eastern capital cities”.
The Bank says that low interest rates have been supporting the domestic economy in its transition away from mining investment but also said that the “the lower exchange rate since 2013 is helping the traded sector.”
Ivan Colhoun, NAB
“With today’s cut, which was contrary to our expectations, NAB is forecasting the cash rate to remain unchanged at 1.50% for the foreseeable future. But we now flag the potential for further interest rate reductions in 2017, given the likelihood that Australian inflation is expected to remain very low for an extended period. Should the economic outlook fail to improve or deteriorate, the inflation outlook continues to provide scope for further rate cuts in Australia.”