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RBA holds rates at 1.5pc ahead of election

Glenn Freeman with AAP  |  07 May 2019Text size  Decrease  Increase  |  
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The Reserve Bank of Australia has left the official interest rates unchanged at 1.5 per cent, extending the record run of inactivity on rates and resisting the pressure for a pre-election cut.

The last time the official cash rate shifted was in August 2016, when it was cut to 1.5 per cent. The cash rate hasn't been increased since November 2010.

The decision precedes an update to economic forecasts in the RBA’s Statement on Monetary Policy due out this Friday and the federal election on 18 May.

The RBA moved on rates in both the 2007 and 2013 election campaigns.

Many economists and analysts had pointed to last month's figures on inflation, which fell to zero in the March, as a catalyst for a rate cut.

Given today's decision, CoreLogic's Tim Lawless says the already low inflation environment makes the RBA's already optimistic inflation target near impossible.

The RBA has been targeting inflation of between 2-3 per cent.

RBA governor Lowe is looking for underlying inflation of 1.75 per cent this year and 2 per cent in 2020.

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"In headline terms, inflation is expected to be around 2 per cent this year, boosted by the recent increase in petrol prices."

Strong expectations remain for up to two 0.25 percentage point cuts before the end of 2019.

The RBA board cited a reasonable outlook for the global economy with "accommodative" financial conditions, and anticipated growth in Australia of about 2.75 per cent in 2019 as reasons for its decision.

It pointed to increased investment in infrastructure and a pick-up in activity in the resources sector, partly in response to an increase in the prices of Australia's exports.

Australia's trade surplus of $4.9 billion in March beat expectations and lifted the quarter total to a new record of $14.7 billion.

RBA governor Philip Lowe highlighted household consumption as the main domestic uncertainty, "which is being affected by a protracted period of low income growth and declining housing prices".

"Lower housing-related costs and a range of policy decisions affecting administered prices both contributed to this outcome," Lowe said.

He also said some increased growth in household disposable income is expected and should support consumption.

"The adjustment in established housing markets is continuing, after the earlier large run-up in prices in some cities. Conditions remain soft and rent inflation remains low."

Lowe noted that mortgage rates remained low and growth in credit extended to housing owner-occupiers had eased over the past year.

Effect on bond markets

Morningstar Investment Management focused on the effect on local credit markets, while noting several reductions in policy rates during 2019 are already priced in.

"We’ve seen some meaningful moves bond yields over the past 6-8 months, as Australian 10-year bond yields were around  2.75 per cent as recently as September 2018, and  today they are closer to 1.80 per cent.

"But that doesn’t tell the full story, as we’ve also seen a notable inversion in the yield curve," says Matt Wacher, chief investment officer, Morningstar Investment Management Australia.

"As long term investors, we are concerned about the reduced ability of Australian bonds to provide defense within a multi-asset portfolio, given the fall in yields already seen, and we see relatively better value in shorter dated US bonds."

However, he believes Australian bonds remain a better proposition than those of many other developed markets, such as Germany and Japan, where 10 year yields are negative or close to zero.

RBA rates and Australian housing

Housing has been a key argument from those in favour of a cut in interest rates – including AMP Capital's Shane Oliver.

"While rate cuts may not be as potent with higher household debt levels today and tighter bank lending standards, they should provide some help," Oliver said last week.

He suggested a rate cut would help Australians with mortgages, even though such a move is less "potent" than tighter bank-lending standards.

Oliver also responded to arguments that many Australians with mortgages simply maintain the same payments regardless, and that any benefit is offset by reduced spending by retirees:

  • Households benefit given the high level of household debt, at $2.4 trillion
  • Australian families with mortgages respond to the increased spending power much more than retirees
  • Assistance that falling rates have provided in offsetting the collapse in mining investment since 2011
  • Rate cuts' downward momentum on the Australian dollar

The RBA decision comes after ABS data showed soft retail sales in the March quarter, down 0.1 per cent when adjusted for inflation. This posed a downside risk to economic growth in the quarter, and offset a strong quarter for international trade.

The Australian dollar rallied slightly on the RBA decision, up half a cent to 70.42 cents and lifting today's gain to 0.7 per cent.

. Glenn Freeman is senior editor, Morningstar Australia.

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