Reserve Bank nearer to the end of this easing cycle
Good morning.
No surprises are expected this afternoon at 2.30pm when the RBA announces it's monthly decision on monetary policy.
The decision will be to leave the cash rate at 3%, and maintain interest rates at 30 year lows. Clearly the transmission of lower interest rates is being successfully passed through to consumers in Australia, via variable mortgage lending.
Australian Economic Data continues to improve.
Since the last Board Meeting, economic data in Australia has continued to produce better outcomes than have been expected.
Home and Investment Loans rose close to 5% last month, Building approvals rose 5.1% in April, Retail Sales have continued to be positive, and medium to lower House prices have improved, buoyed both by lower rates and the various forms of stimulus.
Commodity prices have also staged solid gains, adding to the view that a turnaround is in place and that Australia will be an early beneficiary.
Overall economic activity is showing positive signs of recovery, and very recently manufacturing data in both China and the US has been encouraging.
Stock markets globally have risen between 30% and 60% from the lows of despair, with most major indices now in positive territory for calendar 2009.
3% is looking more like the low for this cycle.
Debt markets have been backing away from Economists view of several more rate cuts, with the most common view that we may get one more cut of 25 points.
The problem is that any further rate cuts will not deliver much impact. A 25 point RBA rate cut, would deliver about a $20 loan repayment reduction on a 200K variable loan (with 15 bp pass on), and that is getting toward a marginal benefit.
Last month the RBA provided the following reasoning for leaving rates at 3%......
Monetary policy has been eased significantly. Market and mortgage rates are at very low levels by historical standards and business loan rates are below average, reducing debt‑servicing burdens considerably. Much of the effect of these changes is yet to be observed. The stance of monetary policy, together with the substantial fiscal initiatives, will provide significant support to domestic demand over the period ahead.
So against that background, the improving domestic data and the emerging signs of a global recovery, the RBA will keep the cash rate at 3% today. Expect the accompanying statement at 2.30pm to remain positive as to the outlook for Australia and our trading partners.
No change today will be back to back outcomes of 3%. Markets have commenced to muse over the timing of rate rises.
After the RBA commenced to front-load rate cuts late last year, interest rate markets have started to question the timing of rate hikes and will anticipate the RBA moves.
It's too early to form a clear view, but it does appear that sometime in 2010, rates will be higher than now.
With kind regards
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