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Stephen Halmarick
To no one's surprise, the Reserve Bank kept the key rate at 1.5% at the July Council meeting. Monetary policy is unchanged since August 2016 – the longest period of inactivity of the RBA since it began to publish the target rate in the early 1990s.
This long period stability of the liquidity rate should continue. Indeed, we expect the cash rate to be on hold until February 2019 – but with the risk that this prospect will be longer and longer for an even longer period.
This long period of stable interest rates has naturally RBA observers question the wisdom of a period of inactivity as long
Some have argued that the RBA should lower interest rates. Noting with sufficient precision that at 5.4% the unemployment rate in Australia is still higher than full employment and much higher than in other similar economies – the US unemployment rate is 3.8%.
Some have argued that the ABR could accelerate the pace of demand growth and further reduce the unemployment rate, especially as the inflation rate has been low.
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On the other hand, some argue that the RBA should raise its interest rates. With annual economic growth exceeding its long-term potential of about 3 percent, it has been argued that any unused capacity in the economy is now exhausted and that it would be prudent for the RBA to start bringing monetary policy to a higher level. "Normal" long before there are signs of significant inflationary pressures.
The dividing line between these two viewpoints is the RBA, which argued, in our view, that yes, it could squeeze a little more demand by lowering interest rates, but with a ratio With gross household debt close to 200% and general household balance sheet concerns, the "cost" of this additional growth could be even more vulnerable for the household sector. Until recently, the rapid rise in real estate prices in Australia has also been viewed as going against calls for even lower interest rates.
The rise in interest rates was also avoided by the RBA. This means that there is still a lot of unused capacity in the labor market and that inflationary pressures should remain moderate. Inflation having been below the target range for several years, the RBA sees no rush to raise interest rates just as inflation returns to the bottom of the target area.
The other central banks remain accommodative
The inactivity of the RBA must also be seen in the global context. The leader in monetary policy adjustment has been the US Federal Reserve. From 0% at the end of 2015, the target rate for federal funds is now between 1.75% and 2%. In our opinion, the Fed will likely increase the federal funds rate two more times in 2018, then two more times in the first half of 2019 to reach a 3 percent high.
In contrast, expectations of higher interest rates in other major central banks continue to be pushed back.
In Europe, the President of the ECB recently said that official interest rates would be maintained "at their current levels at least during the summer of 2019". This, combined with an apparent loss of momentum for the European economy, pushed us back from our timing of the first ECB rate hike from June to September 2019.
In Japan, after some excitement at the beginning of the year The Bank of Japan could be ready to raise its official interest rates and at 10 years of 0.1% and 0% respectively, recent signs of a deceleration of inflation and weak GDP growth reinforcing the idea that monetary policy In Japan, we can expect this country to remain very accommodative for many years to come.
Even in New Zealand, the RBNZ has suggested that any official exchange rate increase over the current rate of 1.75% is a bit far. As a result, we now expect the first rate hike in November 2019 rather than in August
. Thus, Australia's very long period of unchanged monetary policy must be viewed both in a local and global context. The RBA is drawing a dividing line between the two – way pressures of the local economy and the divergence of the monetary policy actions of the major central banks on a world – wide scale. As a result, we are seeing the RBA retain the cash rate at its current level at least until February 2019 and perhaps longer – and support the "patient" approach of the RBA.
Stephen Halmarick is Head of Global Markets Research at the Commonwealth Bank of Australia
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