This is one interest rate decision from the Reserve Bank of Australia (RBA) that punters will find difficult to focus on as it comes just before the start of the Melbourne Cup. The fact that just about no one is expecting the RBA to change its stand on our record low cash rate at its 27th consecutive monthly meeting makes paying attention a moot point with both the Australian dollar and S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index barely budging. However, there are three interesting things from the RBA’s decision that investors should know about. The first and arguably most significant takeaway…
This is one interest rate decision from the Reserve Bank of Australia (RBA) that punters will find difficult to focus on as it comes just before the start of the Melbourne Cup.
The fact that just about no one is expecting the RBA to change its stand on our record low cash rate at its 27th consecutive monthly meeting makes paying attention a moot point with both the Australian dollar and S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index barely budging.
However, there are three interesting things from the RBA’s decision that investors should know about.
The first and arguably most significant takeaway is that the path of least resistance for interest rates is down – not up!
This is despite the fact that the RBA has modestly upped its growth expectations for our economy, but I’ll talk about that later.
The market is focused on when interest rates here will rise (and it’s still probably more likely to go up than down when the RBA finally makes a move), but the central bank’s statement that accompanied its rate decision makes me think that their hands are tied when it comes to lifting rates, while there’s nothing really stopping the RBA from cutting.
RBA governor Philip Lowe stated that inflation will rise slowly but gradually and that the Australian economy is performing well as he acknowledged that the record low rate of 1.5% is needed to keep these two conditions on the right side of history.
“Inflation is expected to pick up over the next couple of years, with the pick-up likely to be gradual,” said Dr Lowe.
“The central scenario is for inflation to be 2¼ per cent in 2019 and a bit higher in the following year.”
Any increase in the official cash rate will suppress both inflation and growth, and that’s not what the RBA wants. The central bank will probably want to wait till inflation stabilises within its 2%-3% band before moving on rates, and that means 2019 or 2020.
The other key takeaway is the RBA’s observation that bank funding pressure has eased in recent times but that mortgage rates are a little higher than a few months ago.
What this means is that even if money-market rates continue to ease, we are unlikely to see banks lower mortgage rates.
The cost of debt will keep going up regardless of what the RBA does.
Finally, it feels to me that Dr Lowe spent quite a bit of time talking up the Australian economy. He is forecasting a drop in the jobless rate and pointed out that gross domestic product (GDP) growth increased by 3.4% over the past year and how this is expected to increase to 3.5% in 2018 and 2019.
That’s an increase from the 3.25% that the central bank was forecasting before.
While he did touch on some of the risks to our economy, such as uncertainty on household spending and global trade (which are essentially a cut and pasted from previous statements), there were a lot more positive references regarding our economy.
While that’s good news, it does seem that he wanted to reassure investors that things aren’t quite as gloomy as some believe.
This may be something to do with the large share market sell-off we suffered in October.
I cannot agree more that the volatility is a distraction, if not a great buying opportunity for stock investors with stronger GDP projections and low interest rates.
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Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited and 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.