Ru­ral Bank trea­surer Rudy Bo­eff be­lieves the Re­serve Bank of Aus­tralia may look at op­tions be­yond rate cuts to take the sting out of over­heated prop­erty prices in some ar­eas and off­set­ting the in­fla­tion­ary ef­fect of ma­jor im­pact such as lower oil prices

Australian Farmers & Dealers Journal - - News -

AS we move into 2015, Aus­tralia’s eco­nomic tran­si­tion out of the min­ing boom has be­come more chal­leng­ing against a back­drop of lower com­mod­ity prices and a weaker cur­rency.

The Re­serve Bank of Aus­tralia (RBA) has held the of­fi­cial cash rate at a record low 2.5 per cent since Au­gust 2013, sup­port­ing pri­vate sec­tor credit and in­vest­ment in Aus­tralia’s non-min­ing sec­tor. The RBA has also con­tin­ued to “talk down” the Aus­tralian dol­lar, sig­nalling through­out 2014 that our dol­lar was too high.

Eco­nomic data re­leases go­ing into the lat­ter part of 2014 were mixed. On the weak side, mea­sures of con­sumer confidence posted their low­est lev­els since 2011, em­ploy­ment growth was soft and the un­em­ploy­ment rate has in­creased to an 11-year high of 6.3 per cent, and wage growth has re­mained stag­nant at 2.6 per cent, its low­est ever an­nual growth rate. On the pos­i­tives, in­fla­tion re­mains un­der con­trol and in the mid­dle of the RBA’s tar­get range, while house prices have con­tin­ued to strengthen over the past year – a pos­i­tive for the non-min­ing sec­tor of the econ­omy.

The do­mes­tic econ­omy has been strug­gling to cope with the end of a once-in-a-cen­tury re­sources boom and a slow­down in China, which pur­chases more than 35 per cent of Aus­tralia’s over­seas ship­ments.


Eco­nomic growth un­ex­pect­edly slowed to 0.3 per cent in the third quar­ter, rep­re­sent­ing the weak­est quar­ter in 18 months.

The price for iron ore, which ac­counts for one-fifth of Aus­tralia’s ex­port in­come, dropped by al­most half in 2014, prompt­ing econ­o­mists to pre­dict the RBA will cut rates this year. Mar­ket pric­ing for an­other rate cut in 2015 is strong.

The 30-day cash fu­tures mar­ket shows 80 per cent prob­a­bil­ity that a rate cut will be made by May and, if not then, a drop in rates by June is priced in with an even higher prob­a­bil­ity. In ad­di­tion, the mar­ket has a 40 per cent prob­a­bil­ity of a fur­ther rate cut (to 2 per cent) by the end of 2015.

How­ever last year, the RBA Board con­tin­ued to note that, on the in­for­ma­tion avail­able, the “cur­rent stance of mone­tary pol­icy con­tin­ued to be ap­pro­pri­ate for fos­ter­ing sus­tain­able growth in de­mand and in­fla­tion out­comes con­sis­tent with the tar­get”, and the “most pru­dent course was likely to be a pe­riod of sta­bil­ity in in­ter­est rates.”

So, what does that re­ally mean for rates in 2015?

The re­cent fall in con­sumer confidence (down 5.7 per cent, to the low­est point since 2011) and pull­back in busi­ness confidence in De­cem­ber re­flects in part the rate cut spec­u­la­tion that sur­faced at the time.

It ap­pears house­holds and busi­nesses now equate fur­ther rate cuts with “bad” eco­nomic news.

So, an­other in­ter­est rate cut could be counter-pro­duc­tive and hurt confidence lev­els.


While the ar­gu­ments for an­other im­mi­nent rate cut look soft, those ar­gu­ing for a rate rise also face some dif­fi­cul­ties.

These in­clude:

The Re­serve Bank’s pro­mo­tion of macro­pru­den­tial mea­sures rather than in­ter­est rates to take the heat out of key parts of the hous­ing mar­ket.

The Aus­tralian Bureau of Sta­tis­tics’ re­cent volatil­ity in em­ploy­ment num­bers has seen an­a­lysts lose confidence in the data, which it may take some time to re­gain, lead­ing to a “wai­t­and­see” mone­tary pol­icy ap­proach.

Lower oil prices will put fur­ther down­ward pres­sure on in­fla­tion. We should see a grad­ual re­cov­ery in the non-min­ing sec­tor of the econ­omy, sup­ported by low in­ter­est rates and a weaker cur­rency.

Lower oil prices will as­sist, boost­ing dis­cre­tionary spend­ing by house­holds and busi­nesses and act­ing as a quasi-eas­ing. This is likely to be un­der­pinned by a mildly sup­port­ive but mixed global back­drop, with a strength­en­ing US econ­omy and weaker (but more sus­tain­able) eco­nomic growth in China. Tak­ing all of these fac­tors into ac­count, I be­lieve there is a fur­ther ar­gu­ment the RBA may re­main on hold through­out the ma­jor­ity of 2015 be­fore the mone­tary pol­icy nor­mal­i­sa­tion process be­gins in late 2015.

Nat­u­rally, this view is based only on cur­rent state as we en­ter 2015 and time will tell whether my forecast is re­alised.

Rudy Bo­eff: In­fla­tion re­mains un­der con­trol and in the mid­dle of the RBA’s tar­get range, while house prices have con­tin­ued to strengthen over the past year

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