Why the RBA Decided Not to Cut Interest Rates in April

The RBA announcement to keep official  interest rates on hold was met with an awkward silence. But the decision itself held plenty of good news.

If you waited with bated breath for the April announcement, it may have disappointed you. Still, there’s plenty you can take away from it. Read on to find out what.

Why the interest rate announcement was good news — not no news

If you’re anything like me, when Glenn Stevens writes (or speaks), you listen. The man has gravitas.

RBA Glen Stevens

Source: abc.net.au

Every announcement and speech he makes seems serious. He’s been called ‘the man who (can) create market mayhem’, ‘the person that nobody knows and yet …who controls their lives’, and ‘the kind of leader whose every utterance lends gravitas to any occasion’. It’s almost too much sometimes.

RBA Glen Stevens 2

Ah, much better. Source: abc.net.au and etsy

Perhaps this is why this month’s statement was received with such solemnity.

Commentators had said that cutting rates again would cause savers to lose on interest and retirees to lose income. And that a rate cut would price first home buyers or upgraders out of the market. Financial System Inquiry chair David Murray said ‘It’s hard for people to get into housing…particularly as interest rates get lower and lower.’ Analyst Peter Arnold noted that ‘After tax and inflation, (home deposit savers and retirees are) not really going forward at all. It’s pretty bad news for anyone with a decent amount of money in the bank.’

With the RBA holding rates steady, it seems their concerns are unfounded…for now. But that could all change when the RBA meets again next month. In case you missed it, here’s why the RBA decided not to lower interest rates.

Three positive reasons why the RBA decided not to lower rates

  1. The US economy (is) continuing to strengthen
  2. Good news for the US economy is good news for the Australian economy. The US is one of our biggest import partners, second only to China. When businesses (and people) are doing better thanks to a better US economy, they can afford to buy more of the stuff we sell them.

  3. The Australian dollar has declined noticeably (and) further depreciation seems likely
  4. A lower Australian dollar should mean exports will grow. This would be good for businesses from a variety of sectors. According to Stevens’s statement, if it keeps going down, Australia will ‘achieve balanced growth’.

  5. Lending to businesses…has been strengthening recentlyFinancing costs for creditworthy borrowers remain remarkably low… Growth in labour costs (is) subdued.’
  6. In Australia, around two million small and medium businesses provide over 60% of employment. If the price of labour stays the same, but they’re able to access more credit, then they’re more likely to survive and thrive. This means that even though ‘the unemployment rate has gradually moved higher over the past year’, it should stagnate or fall soon.

What the RBA decision could mean for you

Your approach to Tuesday’s RBA interest rate announcement will depend on the spread of your investments. If you have a lot in cash, you might want to heed Stevens’s statement that ‘easing of policy may be appropriate over the period ahead’ — i.e. rate cuts may still be coming. On the other hand, if you own stocks, you may want to take stock of your investments. Continuing low interest rates mean our dollar is likely to stay low. That’s good news for exporters but could signal higher costs and lower profits for importers.

Eva Mellors
Contributor, Money Morning

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