C&G – RBA’s November Rate Announcement

Market Updates

Last week’s Melbourne Cup gave us both the race that stops the nation and some interesting news from the RBA. Their announcement that official interest rates would remain on hold over November indicates confidence and the ability for market forces to ‘do their job’. Today the C&G blog looks at the motivation behind November’s rate-hold decision from the RBA.

November’s announcement is no big surprise to industry pundits – as rates have been held steady for the past few months. "It was appropriate to hold the cash rate steady but not close off the possibility of reducing it further should that be needed to support economic activity," the RBA said in its quarterly statement on monetary policy. A further rate cut may very well be on the cards if unemployment levels push toward 6%.

Activity within the local economy is still quite slow.  The weak recovery of our dollar against the US dollar gives the impression that we have some way to go towards improving productivity. Couple this with an unenthusiastic share market, and it is easy to see why the RBA has employed a “wait and see” approach to any national cash rate changes.  

Commodity prices keep falling, but fortunately the Australian dollar is not falling at the same pace.  The RBA is circumspect on the mining and resource sectors, noting that "based on company statements and the bank's liaison, mining investment looks like it might decline more than was previously anticipated”. Governor Glenn Stevens again complained about the strong Australian currency, saying it was "uncomfortably high'' and a "source of uncertainty'' for the Australian economy.

JP Morgan economist Ben Jarman says the Reserve Bank is setting up a "game of chicken'' between the cash rate and the Australian dollar.  He says the central bank is hoping the exchange rate will fall and help stimulate the Australian economy, saving the RBA from further rate cuts.  "They will have to stare down the data and under-deliver on rates through another year of sub-trend growth and rising unemployment.  We are skeptical they can do this.”

Next month is the last meeting of the Reserve Bank Board for 2013 until February next year.  We wait patiently for our new economic chapter to be revealed after the first sitting week of the 44th Parliament.  Might we enjoy increased stability in the market place?  Only time will tell.