The Reserve Bank Board met this week and kept official interest rates on hold at 2.0%.
Having cut official rates in May, we expect the RBA will now pause for several months to assess the impact of these historically low interest rate settings.
Stronger consumer confidence
Today’s decision would have been influenced by the strong bounce in consumer confidence, which rose 6.8% after the interest rate cut last month and the well-received Federal Budget. This is the strongest response by consumers since the 2006/7 pre-election Budget.
Weak business investment
Business investment is one of the key missing ingredients needed for the Australian economy’s transition from its reliance on the mining investment boom.
The recently released survey of non-mining capital expenditure for the March quarter was down 4.4%; that’s two years of declines.
Lower Australian dollar needed
The RBA may have been somewhat frustrated that, immediately following May’s rate cut, the Australian dollar initially rallied to over 81 US cents and has been stubbornly above 79 US cents until recently.
Potential for future cut
The RBA’s own forecasts, released in the Statement of Monetary Policy, suggest an Australian economic landscape impacted by a lower value of exports, below-trend growth, lower inflation, excess capacity and a possible further rise in unemployment. These factors combined suggest an additional rate cut may be required.
Macquarie’s economists maintain their forecasts that there will be one more rate cut this year, probably in November, taking the official cash rate to 1.75%.
The next RBA board meeting will be held on Tuesday 7 July.
Source: Macquarie Bank
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