The Reserve Bank board has said today that it didn’t need to cut interest rates because economic conditions have improved, but at the same time, inflation is so low that if it needs to cut rates in the future it can.
It seems like the RBA has taken out some insurance to cover itself in case it does need to cut down the track, but on balance, a cut near term doesn’t look likely.
While the Australian economy is growing at a slower than normal pace, there are signs of improvement.
Businesses are borrowing more money to invest, the outlook for employment has improved, business and consumer confidence is also on the up.
The RBA noticed all this and said in its statement, “At today’s meeting the Board judged that the prospects for an improvement in economic conditions had firmed a little over recent months and that leaving the cash rate unchanged was appropriate at this meeting.”
It also acknowleged that house price growth has eased with risks contained.
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While mortgage holders may be feeling a little ripped-off because the banks have lifted variable rates, the reality is, Australians can afford higher rates.
Apart from increasing property values boosting wealth, Westpac CEO Brian Hartzer said yesterday that mortgage rates are at their lowest since 1968 and that 74 per cent of its customers are ahead on their repayments.
The Australian dollar has also become less of a headache for the Reserve, which says, “The Australian dollar is adjusting to the significant declines in key commodity prices.”
So, the RBA’s attention returns to inflation which is low. Very low. And it’s expected to stay that way.
“Members also observed that the outlook for inflation may afford scope for further easing of policy, should that be appropriate to lend support to demand,” it says.
The underlying rate of inflation stands at 2.15 per cent, that’s at the bottom end of the RBA’s 2-3 per cent target band.
If inflation continues to ease, that could trigger a rate cut, because consumers will start to spend less.
Think of it this way.
You’re in the market for a new TV.
If prices rise too quickly, then you won’t buy one because it’s too expensive.
If prices fall, you might hold off on purchasing one because you’d assume it could be even cheaper further ahead.
That’s why you don’t want inflation to be too high, or too soft, but at a sustainable pace, which the RBA puts at 2-3 per cent.
There are challenges still ahead for the Australian economy as it continues its structural shift from mining to non-mining, especially as the housing market starts to slow down.
But an RBA cut right now could have spooked investors and confidence at a time when confidence is returning in the lead up to Christmas and after a leadership change.
The other major factor is America’s Federal Reserve. The world is waiting for when it begins lifting interest rates.
When it does, there’ll be more support for the US currency and it should aid global confidence because higher interest rates are generally a sign of a growing economy.