The RBA left the interest rate unchanged yesterday at 1.5%. This is in line with a policy that has been in place since August 2016.
The longer-term picture for interest rates, however, could involve one or possibly two 25 basis point cuts this year.
Key wording on interest rates from RBA policy statement
This is the key, final paragraph from the RBA policy statement:
‘The low level of interest rates is continuing to support the Australian economy. Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual. Taking account of the available information, the Board judged that it was appropriate to hold the stance of policy unchanged at this meeting. The Board will continue to monitor developments and set monetary policy to support sustainable growth in the economy and achieve the inflation target over time.’
The problem here is that inflation is disproportionately propped up by alcohol and tobacco tax increases (A. & t. stands for alcohol and tobacco):
Source: Australian Bureau of Statistics
We aren’t saying that they are unjustified, more so just emphasising how they skew inflation data.
So, the picture here is not as rosy as the RBA thinks.
The unemployment rate fell to 4.9% in February, and job vacancies rose to the highest level on record as well.
That being said, according to the NAB Business Survey, business confidence has weakened in March and mining remains a rare shining light, with retail dragging things down.
Mining confidence is likely underpinned by an iron ore price surge following a disaster in Brazil.
How long strong demand for iron ore will prop up the economy remains to be seen.
RBNZ could lead the way on interest rates
Across the Tasman, the Reserve Bank of New Zealand late last month hinted that it too may cut interest rates, perhaps before us.
As it has indicated, the ABS sees softening labour market conditions as the trigger for a more dovish policy.
For reference, this is the ANZ job advertisements data, where the trend appears to be running out of steam:
Source: ANZ Research
This data usually acts as a forward indicator of future unemployment levels — so keep an eye out for unemployment level increases in the coming months.
As a result, and a lot of this depends on global growth, an interest rate cut may fall in August and perhaps again in November.
For Money Morning
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