The 2% cash rate in Australia is here to stay—at least for a while. The announcement came following Tuesday’s policy meeting and took many analysts by surprise.
Maintaining the current status quo on interest rates seems to be the going trend at the moment. The Federal Reserve last week also chose to leave the current interest rate—which has remained at zero for close to nine years—unchanged.
Both central banks have been watching the global economic picture as well as their own local financial situation and have concluded that nothing should be done to rock the boat at the moment.
The RBA board estimated that the prospects for the country’s improved economic condition had strengthened somewhat over the last few months.
The RBS board estimated that the prospects for the country’s improved economic condition had strengthened somewhat over the last few months and that a cut in the cash rate at this time was not called for. Should there be a further softening of inflation, they maintained, the need for a rate cut would be re-examined.
Low Inflation Not Low Enough
The September quarter Consumer Price Index (CPI) released last week showed annual inflation was running at just 1.5 per cent, weaker than expected and below the RBA's forecasts. But this wasn’t enough to motivate an RBS rate cut.
Economists have been divided on the impact of a continued 2 per cent cash rate and voting at the policy meeting was close. Most of the major Australian banking concerns, including Westpac, ANZ, the Commonwealth Bank and NAB, predicted last month that the RBS would come through with a cut of between 15 to 20 basis points. That did not happen.
The Australian Retailers Association (ARA) had been calling for a reduction in interest rates for some time and was disappointed at the RBS decision.
The Australian dollar is directly affected by the country’s interest rates rise. When interest rates go up, the AUD is strengthened against other currencies. A strong Australian dollar attracts overseas investors and drives up demand for the Australian currency. It can also reduce the returns from global shares for Australian investors. Conversely, when there is a drop in interest rates, the AUD weakens against other currencies and Australian exports and commodities become more affordable for foreign buyers.
The effect of the RBS determination on the global economy may not be felt immediately and will probably be short-lived.
Low Rates=More Spending
It is, of course, the Australian consumer that is most directly affected by the ups and downs of the interest rate. Aussies benefit from a lower interest rate by paying lower debt repayments while leaving the rate as it is at the moment means continued higher repayments on loans, credit cards and mortgages. This in turn decreases the average consumer’s discretionary income and they buy less, causing a drop in retail sales.
The next report to be announced by the RBS is the Statement of Monetary Policy which will be out later in the week and economists are expecting the central bank to revise its inflation forecasts accordingly. Some analysts seem to point to the Fed as the key factor in any RBS move. Should the U.S. central bank introduce an interest rate hike at its next policy meeting in December, it could trigger economic moves around the world and the RBS could be encouraged to move ahead with its own interest rate change.