Outlook: Craig James

With the economy running nicely, cup day will belong to the horses

For many people this month starts the run into Christmas, the holiday season and all that this brings with it, such as long lunches and parties. And the unofficial start of these festivities is Melbourne Cup day – the first Tuesday in November.

Of course, for many investors and many in financial markets the first Tuesday in November is well known as the day when the Reserve Bank board holds its monthly meeting. And for quite a period the Melbourne Cup had to share the attention with a change in the cash rate.

From 2006 to 2011 – six straight years – the board decided to change interest rates on the first Tuesday in November. But in the period since, it has been quiet on Melbourne Cup day.

So while November has had a reputation in the past as a favoured time for the Reserve Bank to act, it has been an unfounded reputation. Some had felt that the bank favoured the month for a rate change because it had the potential to influence Christmas spending.

But there is no set time for the Reserve Bank to cut or lift rates. It depends on the circumstances prevailing at the time and, more importantly, on the bank’s forecasts for economic growth and inflation.

Certainly those forecasts are updated on November 10 – three days after the board meets. And therein lie some of the reasons for November’s reputation as a time for interest rate cuts or hikes.

The board will actually sign off on new forecasts at the November 7 meeting. And it will incorporate the latest inflation figures that were released almost a fortnight earlier.

But considering all that has happened over the past month, there doesn’t appear any reason for the bank to be markedly changing inflation or economic growth forecasts. And, in turn, there is no need for it to change rate settings.

The governor, Philip Lowe, has been unusually frank about monetary policy. He has acknowledged that the money markets are probably right and that the next move in rates is up. But he has also indicated that in his view a rate change won’t happen for “some time”.

Lowe gave his latest speech in late September. At that time he said that economic growth should lift to around 3% (“a bit faster than our current estimate of trend growth in the Australian economy”) leading to lower unemployment, higher wage growth and “a gradual increase in inflation back towards the middle of the 2% to 3% medium-term target range”.

Based on recent economic data and developments on financial markets, it is unlikely that he and the board have dramatically changed their views. The economy is doing well and there are many more grounds for optimism on the global economy.

Of course, the Reserve Bank isn’t on any set or predefined course. If the economy lost momentum, there were new shocks in the global economy and it also looked as if the housing market was headed for a hard, not soft, landing, then it would have no hesitation in cutting rates. But given that it has been highlighting concerns about household debt growing at a faster rate than incomes, it would be a reluctant rate cutter. Reserve Bank officials have been regularly stressing that other policies would be more effective at this time in stimulating economic growth and inflation without adding to debt levels.

At the October meeting the board highlighted the “large pipeline of infrastructure investment” that supported the outlook for business investment and economic growth. Another month of stable interest rates allows investors to make investment decisions with one less thing to worry about.