Mr Stevens reinforced the central bank’s easing bias saying, “Were a change to monetary policy to be required in the near term, it would nearly certainly be an easing, not a tightening”.
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Inflation concerns, or rather a lack of inflation, were seemingly downplayed in the Reserve Bank of Australia’s latest statement accompanying its decision to maintain the cash rate at 2.0%.
However, the market instantly reacted to the RBA’s decision to hold its cash rate at its current level of 2.0% by supporting the Australian Dollar (currency: AUD), sending the GBP AUD exchange rate tumbling to 2.1379 – its lowest level since last month – during the hours which followed.
“When economies are operating below full capacity and inflation is below target, interest rates need to run below nominal growth to hopefully boost growth”, Mr Oliver said.
But the effectiveness of the policy has been complicated by data issues at the banks, which have been exposed first by the regulatory scrutiny that has limited investor loan growth and the tiered pricing as banks responded to the speed limits by raising rates to investors. The RBA is cognizant the economy still needs to rotate away from the heavy reliance on commodities, and is hoping the lower value of the Australian dollar will spur exports and drive economic activity.
The central bank has already cut the cash rate by 25 basis points in both February and May this year.
The update said the most compelling argument for a rate cut is that inflation has surprised on the downside, with underlying inflation now at 0.3 per cent quarter on quarter and falling to 2.2 per cent year-on-year.
So on balance Stevens said the bank’s move to increase interest rates independently of the Reserve Bank wasn’t compounding a deteriorating trend in economic conditions.
All of the big four banks have raised their variable home loan rates, after the introduction of tougher new capital requirements created to act as a buffer in case of financial crisis.
Although that will likely disappoint investors of your typical dividend-paying stocks, such as Telstra Corporation Ltd (ASX: TLS) and Commonwealth Bank of Australia (ASX: CBA), I think it’s a good thing that the RBA held firm.
Macquarie also envisages scope to ease rates and concludes the RBA has a somewhat optimistic outlook. “Ask your lender for a discount or switch to a better deal before the rate hikes take effect”.
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The major banks have collectively cut almost 3,000 jobs during the past six months.
