The Reserve Bank of Australia’s (RBA) decision to keep interest rates on a record low has done little to lift sentiment on the market but it did spark a small rally in the Australian dollar.
The S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index continued to wallow at a 0.5% loss on the news even as the Aussie bounced nearly 0.5% to trade at US72.2 cents on the news.
No one would be surprised by the RBA’s announcement – it’s the worst kept secret on the market – but there are a few interesting things I can gleam from the central bank’s statement accompanying the cash rate decision.
The biggest standout to me is how upbeat the RBA sounds. Our conservative central bankers are looking at our economic environment with a “glass half full” perspective as they sounded more upbeat than they have in the past few statements and are tipping our economy to grow at a little over 3% in 2018 and 2019.
“In the first half of 2018, the economy is estimated to have grown at an above-trend rate,” said RBA Governor, Philip Lowe.
“Business conditions are positive and non-mining business investment is expected to increase. Higher levels of public infrastructure investment are also supporting the economy, as is growth in resource exports.”
The RBA also pointed out that global growth is continuing with “a number of advanced economies” expanding at an above-trend rate.
While it acknowledged that China is slowing, it seemed to be quietly confident that the Chinese government can manage the risk.
The second point of note is the increased focus on the Australian dollar, which has been weakening of late to fall to a 20-month plus low yesterday at below US72 cents. While nothing explicit was said, the sense I get is the RBA is happy with the weakening dollar as that helps with stimulating the local economy and getting inflation back to its normal band.
Inflation sits around 2% and the central bank is expecting this figure to rise in 2019 and 2020, although one-off factors will weigh on price rises in the September quarter with inflation tipped to drop to 1.75%.
The third key takeaway is that the RBA doesn’t want to rock the boat. It’s happy with the way things are going and it knows it needs interest rates to stay low to keep our economy on-track.
The fact that Westpac Banking Corp (ASX: WBC) and Suncorp Group Ltd (ASX: SUN) have lifted interest rates on mortgages also puts away what little pressure there is for the RBA to lift the official cash rate. Other banks are expected to follow Westpac’s lead too.
The key risks to our economy are the uncertainty around household consumption, which is made worse by the drought, and the threat of a global trade war, according to the RBA, although it only made very brief mentions of the negatives.
After all, the RBA won’t want to spook investors during this delicate phase of the economic cycle.
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Motley Fool contributor Brendon Lau owns shares of Westpac Banking. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.