When the Reserve Bank of Australia unexpectedly cut interest rates for the first time in 18 months in February, it sent a message to the market that we were entering a new period of easing in monetary policy. Since that date however, the RBA has twice elected to leave rates unchanged, even though the need for easing was arguably more necessary than it had been in February.
Since 3 February, data has revealed a sharp slowdown in business and consumer spending. Unemployment is sitting near a 12-year high at 6.3%, with many economists forecasting it to climb towards 7% by the end of the year; the Federal Reserve has indicated a slower pace for rising interest rates in the US, pushing the Australian dollar away from the RBA's target price; and iron ore prices have crumbled to a near-decade low, applying enormous pressure to the budgets of governments around the country.
Despite these factors, the RBA has resisted the urge to pull the trigger, choosing to leave rates at 2.25%, much to the surprise of the markets. As highlighted by the Fairfax press this morning, not one bank economist has correctly predicted all three of the RBA's decisions this year. Investors have also been wrong twice, highlighted by the sharp pullback in share prices after the RBA's decisions in March and April.
It's likely that booming house prices are the major concern for the RBA and the reason it has taken a more patient approach. The RBA is mindful that should it cut interest rates to 2%, house prices could be forced even higher, exacerbating the risk of a housing bubble.
Has the "easy money" already been made?
The S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) once again came agonisingly close to breaking the 6,000 point level in the lead-up to the RBA's announcement. But it has since retreated, led by the companies such as Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group (ASX: ANZ), National Australia Bank Ltd. (ASX: NAB) and Telstra Corporation Ltd (ASX: TLS).
In anticipation of further interest rate cuts, investors had pushed those shares to record high prices in order to receive their generous, fully franked dividend yields. However, many investors are now pondering whether the "easy money" has already been made.