RBA Cash Rate to Remain Unchanged for an Extended Period (Amicus View)

Recent economic news suggests to Amicus any changes to the cash rate will be unlikely for at least another year and the RBA cash rate of 1.5% may remain unchanged for even longer.  Reserve Bank Governor, Phillip Lowe, has communicated the RBA can tolerate inflation being below the target band for an extended period and the RBA is more concerned with controlling asset price inflation (or put more plainly ensuring the housing market continues to track sideways or downwards, removing what is perceived as a bubble and therefore a potential serious risk to the Australian economy if it were to “pop” in the form of a house price crash as opposed to “deflate gradually” through a sustained period of zero or mildly negative growth).

Against this backdrop, the RBA is unlikely to lower interest rates unless the economy worsens significantly or unless there is a crisis of confidence (most likely caused by a rapidly falling housing market, or the “bubble popping”).  The RBA is also unlikely to raise interest rates unless there are signs of both wage inflation and this wage inflation beginning to feed into consumer price inflation.  There are few signs of this at present and the very positive GDP growth numbers announced in September seem unsustainable given the levels of household debt and the pressures consumers are under unless consumers receive relief from rising wages which seems unlikely.

The cash rate therefore seems very much constrained from both upward or downward movements with the RBA extremely reluctant to cut interest rates now it has finally got the housing market on the trajectory it wants it to be on, and virtually no signs of inflationary pressures that will move the inflation rate from the lower end of the target band to the mid-point, either in the short or medium term. The longer end of the yield curve is likely to be dragged higher over the next year by rising US interest rates, but the effects on maturities 2 years and under should be more moderate.

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