What the Reserve Bank’s decision not to cut rates means for your business

Economists were unsurprised by the Reserve Bank’s decision yesterday to leave the official cash rate unchanged at 2.75% and warn businesses shouldn’t bank on a rate cut next month.

 

The cash rate is currently at the lowest level in 53 years after May’s rate cut.

The statement from the RBA accompanying yesterday’s decision was the shortest on record at 348 words; a brevity which economists interpreted as reflecting little in the way of new information or significant new economic developments since May.

CommSec’s chief economist Craig James summed up the statement as basically setting out the Reserve Bank’s belief it has cut rates low enough to boost economic growth.

“But if the economy continues to lag and inflation stays low, the Reserve Bank has vowed to cut rates further,” he said in a statement.

James thinks it is unlikely a further interest rate cut will make a difference to business activity levels.

“It is clear that interest rates are sufficiently low to get consumers and businesses borrowing again,” James said.

“But the ‘new conservatism’ continues with people more comfortable about using their own funds to make purchases.”

According to James, it is the long drawn out federal election campaign which is the main driver of uncertainty rather than rates.

ANZ also warned businesses not to expect a further rate cut, with ANZ economist Ivan Colhoun highlighting the RBA’s suggestion that any movement on rates will require at least one further update on the Consumer Price Index.

“This would seem to rule out a further rate cut before the August meeting at least and will also depend on Australian dollar developments in the interim,” he said in a statement.

ANZ is predicting no further rate cuts until November.

The falling Australian dollar was the key factor behind the RBA’s decision not to make a further rate cut yesterday, according to Paul Bloxham, chief economist at HSBC.

“As we expected, it was all about the currency,” he said in a statement.

“After delivering a rate cut last month and getting the additional support of a hefty AUD depreciation, the RBA did not feel the need to cut rates further today.”

Bloxham says the RBA is keeping ammunition to “fight the currency war” and cut rates further if the Australian dollar remains “stubbornly high”.

“The rates and Australian dollar outlook are intertwined,” Bloxham said.

“If the Australian dollar remains well off its peaks, as we are forecasting, the RBA may not need to cut rates further to support growth.”

 

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