September / October 2016

Interest rates outlook

Faced with sluggish growth internationally, monetary policy across the globe remains remarkably accommodative. Interest rates are at or below previous historic lows in many economies – and indeed are in negative territory in Japan.

Here in Australia, the Reserve Bank cut the official cash rate to a new record low of 1.5% p.a. in August. It was reasonable to expect the Reserve Bank would keep rates on hold in September and October, which it did, allowing time for the impact of the August rate cut to filter its way through the economy.

To date, low interest rates have played an important role domestically, acting as a key source of support for consumer demand, and also helping to lower our exchange rate, which is supporting the commercial sector particularly exports.

Looking ahead, inflation remains low at 1.0% p.a. - considerably less than the Reserve Bank’s target range of 2-3% p.a. Given Australia’s subdued wages growth and low cost pressures elsewhere in the world, inflation is not expected to rise any time soon.

Faced with a low-growth global environment and weak (though positive) growth domestically, it is possible the Reserve Bank may cut interest rates further at some stage in the future. Among the cues that could trigger further rate cuts are an appreciation of the Australian dollar, which would negatively impact exports, and over-zealous activity in the property investment sector.

Looking ahead, inflation remains low at 1.0% p.a.- considerably less than the Reserve Bank’s target range of 2-3% p.a.

As it stands, there is certainly a greater case for further rate cuts than for any rate hikes in the foreseeable future. However any further rate cuts are likely to be modest and will probably reflect ongoing fine-tuning rather than a radical shift in monetary policy.

It will be interesting to see how the central bank’s new governor - Philip Lowe, shapes the nation’s monetary policy.

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