The RBA left interest rates on hold, it seems due to issues relating to a stronger world economy, house prices and the fact that financial conditions are already very accommodative.
Obviously issues relating to high unemployment, the fall in the terms of trade, what the RBA sees as an overvalued Australian dollar and very low inflation mattered little as it left Australia with some of the highest interest rates in the industrialised world.
More interesting than today’s decision from the RBA is where to now?
There are clearly some signs of economic resilience or even outright improvement in the economy. New dwelling approvals are booming, retail sales have recorded a particularly robust lift in the last two months and of course house prices and the stock market are as strong as a couple of oxen. The government also appears to have relaxed fiscal policy which, if confirmed in the budget in May, could act to support growth over the next year or two.
Globally, the US is in sound shape, with the economy expanding at a pace sufficient to see the Fed want to hike interest rates some time this year while the Eurozone is registering what looks to be a meaningful upturn after years of being stuck in the quicksand. China is slowing, but not precipitously so and India seems to be gaining strength, aided by a reforming government and a couple of decades of under-performance to address.
To be sure, commodity prices are currently weak and are still in many instances falling and this will act as a drag on the economy for the near term, at least.
But a scenario can be made that in the next few months and through to the end of 2015 that GDP growth will be edging up towards and above 3 per cent, that there will have been a peak in the unemployment rate, perhaps around 6.5 per cent, and that inflation will be nearer the middle of the target band rather than lower.
Maybe there will be no more cuts. Maybe the RBA is right to have delivered one measly rate cut in almost two years. Maybe the next move in interest rates is up… Given where markets pricing is now, even after today’s monetary policy decision, I will be sticking to the strategy that I put out a couple of months ago – here https://thekouk.com/blog/it-s-time-for-a-change-in-view.html