Has Australia’s interest rates stabilised?

The Reserve Bank of Australia (RBA) released its quarterly monetary policy statement during the early Asian trading hours on February 09, 2014 indicating that the overall economic conditions in Australia appeared to be robust, and has raised its economic growth and inflation forecasts for 2014. This latest statement release came a few days after the RBA decided to keep interest rates unchanged at 2.50 percent when it concluded its first monetary policy meeting for 2014 on February 04, 2014. RBA Governor, Mr. Glenn Stevens was quoted in a February 06, 2014 Nikkei Asian Review article as saying he and his team are unlikely to change interest rates, a contrast from his previous statement in late 2013 which the Review quoted RBA’s statement as saying, “the board may adjust policy as needed to foster sustainable growth.”

The consecutive rounds of rate declines since late 2011 were introduced in order to fend off the recessionary threats coming from China’s ongoing economic slowdown, stubbornly high unemployment rates at close to 6.0 percent, foreign multinationals such as Ford Motors, and General Motors planning to head for the exits out of Australia, continued strength of the Australian (Aussie) Dollar, has shown some progress lately in terms of bringing down inflationary expectations. In the lead up to the latest quarterly monetary statement review, it stated that, “The board’s view is that a period of stability in the policy rate is likely.”

Following the release of the quarterly statement during early Asian trading hours, the Aussie climbed to 0.89311 – 0.89320 (bid/ask), and the benchmark stock index, ASX 200 climbed by 25.10 points or 0.49 percent to 5,156.50. Furthermore, according to a Bloomberg News article published following the release of the latest RBA quarterly monetary statement, the RBA forecasted core inflation (ex food and energy costs) of 3.00 percent for the year ending in June, and 2.25 percent to 3.25 percent to December 2014. The latest projection is up from the previous November 2014 forecast of 2.50 percent through June and 2.00 percent to 3.00 percent to December 2014. However, It also expressed its uncertainties over what drove the pickup in consumer prices and it expects inflation to be consistent with its target over the forecast period.

As for the Gross Domestic Product (GDP) forecast for 2014, the RBA expected it to rise by 2.75 percent for the first six months ending in June, and 2.25 percent to 3.25 percent through December, which it claimed that the rise in the GDP growth rate expectations was primarily owing to the lower exchange rate, which it expects to contribute to exports to rise.

Amid the release of the latest quarterly monetary statement, along with various market movements, will investors anticipate any rate hikes anytime soon? Several analysts, and economists interviewed by Bloomberg News think that the RBA will put on hold its current monetary policy rate of 2.50 percent for the time being while at the same time monitor the movements of any major shifts in the consumer spending, household debt levels, and borrowing/lending conditions, among others before making any drastic policy shifts.

The latest announcement on the RBA’s monetary policy decision held on Feb 04 came as many asset prices, other than real estate sector, have become stabilised. The low interest environment in Australia has prompted many real estate investors both domestic, and foreigners, namely those coming from the Mainland China, who have taken advantage of the low interest rate environment, snapping up properties around major cities in Australia, including Sydney, Melbourne, among other big Australian cities. In some suburbs of Australia’s largest cities, namely Sydney, house prices rose by as much as 27.0 percent in the past year, adding to continuous rise in property prices elsewhere. There were some cities where home affordability levels fell as a result of employment losses, rising mortgage rates, and shrinking household sizes. The RBA in this latest Feb 07 quarterly monetary statement indicated somewhat of a concern over the rapid increases property prices and noted that consumption may be rising, as low interest rates helped boost consumer spending.

The latest release of the quarterly monetary policy statement, along with the Feb 04 interest rate decision by RBA appeared to be quite consistent with the overall views that the Australian economy has been stabilised, inflation levels remained subdued in 2014, and economic growth forecasts measured by the GDP has been raised. However, issues’ including a slowdown in the China’s growth, rapid rises in several key big cities’ real estate markets, plant shutdowns, among other economic issues continued to be some of the focus areas that the RBA strived to work on in order to achieve a sustainable and robust economy in Australia, with limited reliance on mining as the main engine of growth. The Australian government, under Prime Minister Tony Abbott might also be prompted to shift its policy focus towards the development of innovation, research and technology sectors.

About Hock Meng Tay - Chief Editor, Asia-Pacific Region

Hock Meng Tay, CAIA has written 181 post in this blog.

Chief Editor, Asia-Pacific Region Hock Meng Tay is a CAIA holder and is currently taking CFA qualification. He has over 10 years of experience working as research associate in several investment companies.He is an expert in financial analysis and has published research reports in his current role. He obtained his Masters of Business Administration in Integrated Management and Masters of Arts in Economics while serving his internship in Starsource Inc

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About Hock Meng Tay - Chief Editor, Asia-Pacific Region

Chief Editor, Asia-Pacific Region Hock Meng Tay is a CAIA holder and is currently taking CFA qualification. He has over 10 years of experience working as research associate in several investment companies.He is an expert in financial analysis and has published research reports in his current role. He obtained his Masters of Business Administration in Integrated Management and Masters of Arts in Economics while serving his internship in Starsource Inc

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