Reserve Bank Surprises No One With Decision

The Reserve Bank of Australia surprised no one with their decision to leave interest steady at 2.5% yesterday. The rate has been at 2.5% for approximately 10 months.

The Reserve Bank sees interest rates as being quite “accommodative” at present.  Certainly with interest rates at almost record fifty year lows this is unarguable. But is the benefit of the lower interest rates actually being taken up in the economy as a whole? The Reserve Bank appears to view growth at “below trend”, but notes that this appears to be changing with their observation that growth has “firmed” since the turn of the year. They note that growth has been seen in exports of primary products and iron ore, but also see consumer demand consolidating. They note that construction has strongly grown in the housing sector. The Reserve Bank appears to feel this will in some cases offset the significant decline in investment in the mining sector. Public sector finances are noted as being subdued, perhaps a reference to the recently delivered budget looking to shave spending. Generally however, there are increasing signs of investment intent, but those actually being made in the current economic climate are actually yet to be seen.

Indicators in the labour market continue to improve, but the Reserve Bank notes there are few signs this will actually translate into a significant decline in unemployment numbers. Additionally wages growth is quite subdued therefore provided domestic costs remain in control inflation is not expected to be a problem over the short to medium term.

Broadly credit growth has increased, this being reflected in the growth of dwelling prices seen in recent months. Interest rates by historical standards are quite low, but the Reserve notes that the exchange rate is still high. This continues to be a concern to the Reserve Bank.

The Reserve Bank is continuing to expect low interest rates to fuel demand and consumption more broadly. Thus they feel interest rates are appropriately set for the short term and a change unlikely in the foreseeable future.