Interest Rate Outlook

  • The Reserve Bank (RBA) left the cash rate at a record low of 1.50% today, as widely expected.  The tone of its media statement struck a more optimistic tone compared with its previous statement in December.  Indeed, the RBA viewed even weaker parts of the economy as a glass half full.
  • The RBA’s take on the global economic outlook was encouraging.  It has expectations of above-trend growth in a number of the advanced economies.
  • The RBA expects economic growth in Australia of around 3% over the next couple of years.  Consensus forecasts and our own forecasts for growth are weaker.  So, the risk of a rate cut down the track cannot be fully dismissed.
  • However, today’s language from the RBA sends a message that rates are on hold this year.  Unless data on growth and employment continues to deteriorate, the RBA is more likely to sit pat on the cash rate this year.
  • Of course, the RBA’s view on inflation is crucial to its interest-rate settings.  It expects inflation to remain low for ‘some time’.  Sometime might be longer than usual because of the difficult juggling act the RBA faces.
  • The RBA must weigh up the benefits of lower rates to growth with the potential risks to household balance sheets.  It suggests the RBA might allow inflation to run below the inflation target for an extended time without any policy action.
  • Fixed borrowing rates, however, are likely to head higher over this year.  Australian bond and swap yields will press higher over this coming year, as US bond and swap yields move higher on expectations of firmer growth and inflation in the United States.