Interest Rates

It seems Australia and NZ central banks are lockstep on monetary policy after the latest statement from across the Tasman.

Reserve Bank Governor Philip Lowe has made it clear he wants the federal and state governments to help monetary policy lift the Australian economy, wages and keep employment buoyant.

It wasn’t quite what financial markets had wanted from the Fed – a sort of watch and wait stance with a more obvious bias towards a rate cut, but no rate cut or hint of any timing. Markets wanted more definite news on the timing of a rate cut.

The RBA’s latest rate cut is aimed at heading off a further slowing in growth which would threaten higher unemployment and lower for longer inflation. For investors, it means low-interest rates for even longer.

The problems in the Australian economy were on full display yesterday, helping explain the RBA rate cut and the sluggish GDP reported later today.

As expected the Reserve Bank cut official interest rates to a new record low of 1.25% on Tuesday (down 0.25%) in an attempt to stimulate a sluggish economy.

The Reserve Bank may be tempted to delay its second rate cut after the May house price data showed another month of stabilising, but other data yesterday left the picture of the economy as confused it has been in recent months.

Two big events this week will set the parameters for the Australian economy for the rest of the year. The RBA will cut rates tomorrow and on Wednesday the first quarter GDP figures will show that it was a booming market for commodities, especially iron ore and LNG that kept the economy on track.

A cut in official interest rates is on the cards after Reserve Bank governor, Philip Lowe made it clear the central bank’s attempts to lift inflation and cut unemployment will not be met on current policy settings.

Australia will get two interest rate cuts this year totaling 0.50%, according to the second Statement of Monetary Policy for 2019 from the Reserve Bank.

The ‘will they or won’t they’ speculation about the Reserve Bank cutting interest rates at its May monetary policy board meeting tomorrow will dominate this week in Australia.

While the US Federal Reserve maintained its ‘wait’ and see’ stance on interest rates at this week’s two-day meeting in Washington, it revealed concerns about the slowing growth of inflation as it described the American economic activity and job gains as “solid”.

Surprisingly weak Australian inflation has led to expectations the Reserve Bank will soon cut rates. But what’s driving low inflation? Is it really that bad? Why not just lower the inflation target? Will rate cuts help? And what does it mean for investors?

The first quarter GDP report, released on Friday suggests the American economy is not as solid as the 3.2% annual rate of growth suggests.

While the RBA has made it clear the strength of the jobs market and its intersection with weak GDP remains its major area of interest, the sharp fall in consumer price inflation in the first three months of this year adds to the central bank’s policy dilemma.

Today (Wednesday) sees the release of the first top tier economic report for the March quarter – the consumer inflation data (CPI) – ahead of the release of the first quarter GDP figures in early June.

The Reserve Bank of Australia has given another hint yet at a possible interest rate cut later this year – but made it clear it won’t happen if the jobs market remains solid, something we will find out tomorrow in the March Labour Force data to be released by the Australian Bureau of Statistics.

The 2019-20 Budget has a sensible focus on providing support to households at the same time as returning the budget to surplus. However, the actual fiscal stimulus is pretty modest – particularly for a pre-election budget – and comes with greater than normal uncertainty given the upcoming election.

In Australia this week will be all about iron ore prices, interest rates, a federal budget and the timing of the May federal election plus the usual start of month economic data.

The Reserve Bank of NZ has shifted ground in its monetary policy stance dramatically, sending a strong tip that the next move in rates will be down.

The Reserve Bank is now closer to a rate cut at any time since the last round in mid-2016 – the last was August of that year to the current cash rate of 1.5%.

January lending data yesterday from the Australian Bureau of Statistics confirmed Reserve Bank figures at the end of February – demand and deals with investors have dried up, lending to owner-occupiers is slowing but loans to business are rising.

Australian growth slowed even more in the December quarter. Growth may bounce back a bit this year, but the housing downturn will likely constrain it to around 2- 2.5%.

Just to make it clear there won’t be an interest rate rise in Australia this year and probably most if not all of 2020 as well – especially not after the second weak quarter of economic growth in a row.

No change in rates from the Reserve Bank yesterday, now for what’s expected to be a weak GDP figure from the December quarter national accounts to be released later this morning.

Figures out yesterday confirmed not only are Australian companies spending more on investment, but the outlook is the strongest for three years.