No Rate Cut, So We Will Have To Wait

By Glenn Dyer | More Articles by Glenn Dyer

While economists now see May as the best bet for an interest rate cut from the Reserve Bank, don’t bank on it.

The bank didn’t cut rates yesterday, as a majority of economists forecast. And while most now reckon May could be good for a reduction, the flow of economic data didn’t showing any real need.

Business lending is rising, car sales hit a record in March and retail sales rose by more than expected (up 0.7%, seasonally adjusted, against a forecast of 0.5%). Building approvals remain solid, pointing to continuing near record levels of spending over the remainder of this year.

The Aussie dollar jumped by a cent after the no cut news was revealed by Governor Glenn Stevens in his now usual 2.30pm statement yesterday, but misguided punters in the stockmarket embarrassed themselves by pushing the ASX up in morning and midday trading by more than 70 points.

The index lost 60 points and more after the 2.30pm announcement, but later regained around 20 points to end the day up 27 points. But that left most in the market no wiser on the day and some out of pocket.

The Reserve Bank can’t do much to affect the continuing fall in iron ore prices (and coal prices for that matter) except to cut rates and try and pull down the value of the dollar, which refuses to follow the terms of trade lower.

While the problem is weak demand, housing construction is firm, retail sales are rising, business lending is definitely rebounding (its growth rate has doubled in the past year) and car sales are very strong. Business investment remains the big weak spot for the economy, demand and employment.

Further falls in the value of the Aussie dollar will depend heavily on the path of the greenback and the weak March jobs report wasn’t good news with the US currency weakening on expectations the long expected lift from the Fed might not happen until much later in the year.

Governor Stevens post meeting statement wasn’t all that different to the one issued after the March meeting – although it did point out that lending to business had been strengthening recently.

RBA data late last month showed private lending at a six-year low in the year to February, up 6.2%, with business lending up 5.6%, also the fastest pace for six years.

Here’s what the core of Mr Stevens statement yesterday said:

"In Australia the available information suggests that growth is continuing at a below-trend pace, with overall domestic demand growth quite weak as business capital expenditure falls. As a result, the unemployment rate has gradually moved higher over the past year. The economy is likely to be operating with a degree of spare capacity for some time yet. With growth in labour costs subdued, it appears likely that inflation will remain consistent with the target over the next one to two years, even with a lower exchange rate.

Credit is recording moderate growth overall. Growth in lending to investors in housing assets is stronger than to owner-occupiers, though neither appears to be picking up further at present. Lending to businesses, on the other hand, has been strengthening recently. Dwelling prices continue to rise strongly in Sydney, though trends have been more varied in a number of other cities. The Bank is working with other regulators to assess and contain risks that may arise from the housing market. In other asset markets, prices for equities and commercial property have risen, in part as a result of declining long-term interest rates.

The Australian dollar has declined noticeably against a rising US dollar over the past year, though less so against a basket of currencies. Further depreciation seems likely, particularly given the significant declines in key commodity prices. A lower exchange rate is likely to be needed to achieve balanced growth in the economy.

At today’s meeting the Board judged that it was appropriate to hold interest rates steady for the time being. Further easing of policy may be appropriate over the period ahead, in order to foster sustainable growth in demand and inflation consistent with the target. The Board will continue to assess the case for such action at forthcoming meetings."

Glenn Dyer

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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