Why we’ve still got a way to go before rates get back to “emergency” levels

Another Reserve Bank decision on interest rates, and another elongated post mortem about whether the Board members did the ‘right’ or ‘wrong’ thing. Clearly you can’t make everyone happy, but the aim of the Reserve Bank Board is to keep the economic expansion going by keeping inflation under control.

The main sticking point to another rate cut? Inflation. From the Reserve Bank Board’s point of view, the last inflation reading was a touch on the high side. Not markedly, mind you, but enough for the Reserve Bank to delay cutting interest rates. At least for now.

And given that pass-through effects of the carbon tax are somewhat uncertain, the caution expressed by the Reserve Bank is understandable.

The only other real difference from October to November was the Reserve Bank’s view on the global economy. The US economy is recording ‘moderate’, not ‘modest’, growth. And the Chinese economy has ‘stabilised’. Clearly this is a watching brief, as much can change over a month.

One important point: the cash rate is nowhere near ’emergency’ levels. The Reserve Bank has been at pains to point out that the focus is on lending rates, not the cash rate. The variable mortgage rate would need to fall around another three quarters of a per cent to reach the so-called emergency levels set in 2009.

The week ahead

In both Australia and the US there will be a constant flow of economic data in the coming week. In Australia the latest wage data (Wednesday) is probably the highlight. In the US there are various ‘top shelf’ indicators to choose from, including inflation, retail sales and production.

In Australia the week kicks off on Monday with September data on home loans (or housing finance).

After significant rate cuts in May and June, most would be expecting a solid uplift in home loan applications. But after a 1.8% increase in home loan commitments in August, we only tip a modest 0.9% lift in September. There may be a better bounce in the value of all home loans though – we tip a 3.7% increase.

Also released on Monday are the Reserve Bank statistics on credit and debit card lending. The average credit card balance fell by a record amount in August and a similar result is likely in September.

On Tuesday the National Australia Bank business survey is released alongside lending finance figures. Both the business confidence reading as well as the reading on business conditions has been camped close to zero in recent months. No major change is expected in the October survey.

Also on Tuesday, Jonathan Kearns, head of the Economic Analysis Department at the Reserve Bank, delivers a speech to an Australian Business Economists Luncheon.

On Wednesday, another double-barrelled helping of data is expected – consumer confidence data and the wage price index. Despite rates being left on hold in November, a firmer sharemarket and the recent drop in fuel prices may have lifted consumer spirits. And we are expecting another tame result on wages with growth of 0.9% in the quarter and 3.9% over the year.

On Thursday, the Australian Bureau of Statistics recasts industry data on new car sales in seasonally adjusted and trend terms. The industry data revealed that 95,584 vehicles were sold in October, up 12.2% on a year ago. This suggests that sales eased modestly by around 1-2% in the month after out-sized gains of over 4% in both August and September.

In the US, Veterans Day is celebrated on Monday. And while government offices and bond markets will be closed, stock markets will be open.

On Tuesday the usual weekly data on chain store sales is released together with monthly estimates on the federal budget.

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