How long can the RBA keep rates on hold?

Monday, 2 February 2015  Media Alerts
​“There is no overwhelming impetus for the RBA to lower interest rates,” said the UNSW Business School’s Professor James Morley, who sits on the Shadow RBA Board. “And it’s important they don’t surprise the market, as the Swiss have done.”

The Reserve Bank of Australia will meet tomorrow to decide on interest rates, and whether to leave the cash rate on hold at 2.5 per cent, where it has had one of the longest periods of rate stability since 1990.

James Morley is a Professor of Economics and Associate Dean (Research) at UNSW Business School. He said “the forecast for the Australian economy is mixed. The collapse of the iron ore price and a much weaker outlook for China is certainly a drag on the Australian economy.” 
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Many analysts have been looking for any language in the RBA’s statement that could signal the start of a rate rise, in the light of a booming housing sector, and the fall in the dollar.

“The continued collapse of iron ore prices and the decline in oil prices has prompted some speculation that the RBA will lower rather than raise them in the near term, especially after the Bank of Canada recently lowered its policy rate in response to the decline in oil prices. It is possible that the RBA will do so,” he said.

He added that headline inflation, currently at 1.7%, should remain below the RBA’s 2 to 3% target range in the short term, given the dramatic recent decline in oil prices. “This provides considerable scope for the RBA to delay any increases in the policy rate until at least the second half of the year.”

He said the RBA will also be keeping a close eye on the latest employment statistics. On Thursday next week there will be fresh unemployment data from the ABS.

“I would recommend the RBA maintain, but not lower, its already low policy rate and monitor how effectively the lower dollar stimulates non-mining exports.”

He said any change in policy direction should be signalled by a public statement, for example by saying it was moving away from a reference to a period of stability in interest rates, rather than trying to surprise markets. “This was recently done by the Swiss National Bank in terms of their unconventional monetary policies. It was perhaps not the best idea.”

For further comment call James Morley on 02 9385 3366, 0406 842 550, or james.morley@unsw.edu.au

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