The Reserve Bank’s decision yesterday to keep interest rates on hold at 2% was largely expected by economists and shows the RBA wants to wait to see the impact of last month’s rate cut and the budget.
A close reading of chair Glenn Stevens’ statement yesterday gives some insight into the reasons why the RBA decided to leave the cash rate unchanged.
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1. Business spending is dragging the economy down
“A key drag on private demand is weakness in business capital expenditure in both the mining and non-mining sectors and this is likely to persist over the coming year,” Stevens said in his statement.
Overall, he said the economy is likely to be operating with a degree of “spare capacity” for some time yet.
Alan Oster, chief economist at the National Australia Bank, told SmartCompany what Stevens is saying is that he is still worried about medium-term business investment although things have improved a little.
“What we now need to do is wait and see the impact of the rate cuts we have already delivered,” he says.
“He was hinting that if they needed to, they could do more.”
2. Inflation isn’t a problem
Stevens said with the very slow growth in labour costs, inflation is forecast to remain on target over the next one to two years, even with a lower exchange rate.
Nicki Hutley, chief economist at Urbis, told SmartCompany because business has been so sluggish retailers haven’t been able to increase prices.
“At some point they are going to have to push prices up but at the moment they can’t do that,” she says.
“Once the economy starts to pick up the RBA will have to move very quickly to keep inflation under control, but that’s not a short-term concern at all.”
3. There’s no property bubble
Whether there is or isn’t a property bubble has been a matter for debate over recent days but the RBA isn’t too concerned at this stage.
“Dwelling prices continue to rise strongly in Sydney, though trends have been more varied in a number of other cities,” Stevens said.
“The bank is working with other regulators to assess and contain risks that may arise from the housing market.”
Oster says it’s clear the RBA doesn’t think there is a property bubble.
“The problem is there is an undersupplied market, low interest rates and a high top marginal tax rate,” he says.
“That’s a combination where there are incentives to invest more. You can’t increase interest rates to kill the Sydney market because other markets outside Melbourne are pretty slow.”
Harley Dale, chief economist at the Housing Industry Association, says what Stevens didn’t say was interesting.
“There was an opportunity there for the bank to up the ante on its rhetoric around housing price growth in Sydney,” he says.
“I think quite correctly they chose not to up the ante there’s plenty of comment circulating as there is.”
4. The Aussie dollar needs to rise
Stevens noted the Australian dollar has “declined noticeably” against a rising US dollar over the past year, though less so against a basket of currencies.
“Further depreciation seems both likely and necessary, particularly given the significant declines in key commodity prices,” Stevens said.
Oster says this is basically a repeat of what Stevens said last month.
“He is still saying it would be helpful if the Aussie dollar rose but it’s always helpful,” he says.