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