Summary of February RBA meeting

By Michael Witts, Treasurer, ING DIRECT Tuesday 7 February: At today’s meeting the RBA Board opted to keep rates unchanged.The RBA cited a range of factors, primarily relating to the global economy in supporting their decision. The...

February 07, 2012

By Michael Witts, Treasurer, ING DIRECT




Tuesday 7 February:
At today’s meeting the RBA Board opted to keep rates unchanged.




The RBA cited a range of factors, primarily relating to the global economy in supporting their decision.




The RBA cut rates in both November and December, in response to the adverse global developments and further potential risks. Since then, the global economy and outlook has not deteriorated to the extent anticipated.




Indeed, financial markets have opened in an especially positive mindset this year, reversing the extreme risk adverse attitude from late 2011.




Progress has been painfully slow in Europe, although there does appear to have been progress made on the Greek debt position.




The US economy has continued to build on the initial signs of growth evident in late 2011.




China confirmed its economy grew at 9% in 2011.




These developments have been reflected in improving equity and commodity markets. The latter has recently broken a downward trend that had been in place for much of the second half of 2011.




It appears the mix of global growth in the period ahead will be driven by US and Asian growth as opposed to the European-Asian mix that has been apparent over the past several years.




Regardless of source, the bottom line for Australia is that global growth will continue, albeit, marginally weaker than previously expected. This will continue to underpin the high level of investment in resources and related sectors of the economy.




The Bank noted the recent weakness in labour markets.


However, the labour market is a function of both short term global uncertainty, but more importantly, the transformational changes that are flowing from the resources boom. Two factors are important here; increased labour demand from capital intensive sectors, and the impact of the higher exchange rate on import competing sectors (manufacturing). In addition labour productivity has been trending lower over recent years.




While there has been anecdotal evidence on the state of the economy since the December rate cut, there has been little in the way of substantive new data. The main components of the December quarter national accounts will be released just prior to the March RBA meeting.




Confidence in the domestic economy is largely a function of offshore developments. If Europe continues not to deteriorate, and the US continues on its seeming growth path, the absence of negative front page news will gradually restore confidence.




The RBA indicated they stand ready and have the capacity to adjust interest rates should the global economy reverse its recent positive tone resulting in weakness in the domestic economy.




Impact for borrowers and savers


Borrowers continue to enjoy historically low level mortgage rates - especially fixed rates. Despite the RBA leaving rates unchanged, mortgage rates will remain around these historic low levels.




The majority of borrowers, usually do not adjust their monthly payments when interest rates are cut, rather they use the constant repayments to consolidate the buffers they have built up.




The increased cost of funds in wholesale markets has resulted in increased competition for domestic non wholesale funds. Again these market conditions will be largely unchanged by RBA actions. Savers will therefore continue to hold the upper hand.