In the face on a raft of positive news on the economy and rising inflation, the RBA has seen fit to leave the cash rate at a super-stimulatory 2.5 per cent.
It appears to have done so because its forecasts are suggesting inflation will soon decelerate and that there will be a reversal of the raft of recent good economic news as it expects the fall in the terms of trade to dampen overall economic growth.
Specifically, the RBA notes that for the global economy, “there are reasonable prospects of a better outcome this year”.
It goes on to say “Financial conditions overall remain very accommodative. Long-term interest rates and most risk spreads remain low. Equity and credit markets are well placed to provide adequate funding”.
It does acknowledge, “Monetary policy remains accommodative. Interest rates are very low and savers continue to look for higher returns in response to low rates on safe instruments” and that “Looking ahead, continued accommodative monetary policy should provide support to demand, and help growth to strengthen over time. Inflation is expected to be consistent with the 2–3 per cent target over the next two years”.
On the down side, the RBA notes, “Commodity prices in historical terms remain high, though some of those important to Australia have softened further of late” and that “resources sector investment spending is set to decline significantly and, at this stage, signs of improvement in investment intentions in other sectors are only tentative”.
The RBA goes on, “it will probably be some time yet before unemployment declines consistently. Growth in wages has declined noticeably and this has been reflected more clearly in the latest price data, which show a moderation in growth in prices for non-traded goods and services. As a result, inflation is consistent with the target”.
With that assessment, it is obvious why interest rates remained on hold.
But it is important to recall – they are just the RBA’s forecasts and while its forecasting record is better than most, it too makes forecasting errors. Which means, almost certainly, its forecasts will again be wrong. The optimists, like me, reckon the RBA error will show up in higher growth and inflation than the RBA assumes and as such, suggest that this will require a monetary tightening to cool demand.
The pessimists reckon the RBA is too upbeat about growth and will one day have to cut rates to lift growth.
We’ll see who is right. But while ever growth is set to hold at or above 3 per cent and the unemployment rate ticks lower, it seems clear the next move in interest rates will be up. When?
Not even the mere mortals at the RBA know that one.