Australian Reserve Bank Interest rates watch: latest to April 2014

Interest rates Australia

For some time the Reserve Bank has left rates unchanged, and the outlook from recent Board minutes suggests a further period of stability in rates could be expected.

August 2013 was the last policy change regarding rates – a decrease in rates to a ‘cash rate’ of 2.5% . This is not to be confused with home loan rates, which usually always operate at a healthy margin above the cash rate. Since August last year Australian economic conditions have been more or less stable with consistent inflation and unemployment rates and a depreciation in the Australian dollar.

An AUD adjustment downwards was highlighted by the Reserve Bank last year as favourable for Australia’s economic good fortune to continue, following a sustained period of a relatively high Australian dollar.

The low cash rate, which has flowed into lower home loan rates and a more competitive home loan market since that time, has contributed to increased property investment by Australians. As a result the recovery in home prices has consolidated since July 2012, now recognised as the bottom of the market cycle, especially in the larger Eastern city markets of Sydney and Melbourne.

In recent Board minutes the Reserve Bank has confirmed that a strong pick-up in dwelling investment was ‘in prospect’. It also confirmed that ‘while falling mining investment and weak public demand were set to constrain growth for some time, there were early promising signs in other parts of the economy’. In particular, there was some evidence that consumer demand was slowly strengthening. Indicators for exports remained strong, while those for business conditions were generally higher than they had been in 2013.

Looking ahead, interestingly the Reserve Bank expects unemployment to rise further before it peaks and over time economic growth is expected to strengthen – helped by continued low interest rates and the lower exchange rate. Inflation is expected to be consistent with the 2–3 per cent target over the next two years.

As a consequence at recent meetings, the Reserve Board has judged that it was best to leave the cash rate unchanged and they also commented that the cash rate could remain at its current level for some time (if the economy was to evolve broadly as expected). Developments over the past month have not changed that assessment.

Daniel Shillito, Aussiefpgroup 
photo credit: bill barber via photopin cc

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