Cash rate widely predicted to hold

by Madelin Tomelty05 Dec 2016
With the final board meeting of the year taking place tomorrow, most economists are predicting the Reserve Bank of Australia will leave the official cash rate at its record low of 1.5% well into 2017.

John Kolenda, managing director of mortgage broker network 1300HomeLoan, says that it is highly likely that the central bank will remain on the fence and leave its cash rate where it is, considering the unrest and shock waves created by Donald Trump’s election and the uncertainty surrounding its effect on the global economy.

Kolenda said there is currently a great deal of conjecture about the direction of interest rates and it does appear fixed rates have bottomed out, which has put pressure on the cost of funds for lenders.

 “The RBA will most likely sit on the fence post the Christmas surge and wait for more robust economic data through the first quarter of next year before we get real clarity about the direction of official rates,” he said.

“With the government focus on the performance of banks, it would be unlikely lenders would raise their variable rates out of cycle to cover any increase in funding costs. They have targeted fixed rates because they don't get the attention variable rates receive.”

Kolenda said at this stage there has not been evidence of improved economic data that would support an increase in variable rates. “We are likely to have to see several months' data before we know where rates will go,” he said.

“But at this stage it's more likely to be a rate rise rather than a decrease but there are many obstacles to navigate before we see the way forward.”

Kolenda’s comments come at a time when the markets have started to price in the possibility of a rate rise in the next twelve months, for the first time since 2014.

However, while many share Kolenda's prediction of a rate hold tomorrow, some economists disagree with the popular opinion that the rate will be hiked in 2017. According to Fairfax Media, they believe a rate cut next year is far more likely, and on considering unimpressive economic growth and stubbornly low inflation, any talk of a rate hike is premature.

Paul Dale from Capital Economics said the RBA was "almost guaranteed to leave interest rates on hold … In fact, we still believe there is a reasonable chance that interest rates will fall to 1.0 per cent next year" should the housing market also cool, he said.

"The bottom line is that, even in light of the leap in commodity prices, it is far too early to conclude that the RBA's low underlying inflation problem has been solved."

Dale’s comments echo Macquarie economist James McIntyre’s prediction of a base case of two RBA cuts in the first half of 2017, which would take the cash rate to 1% - a new record low.

"The recent data flow suggests that the RBA will be presented with weaker-than-expected economic growth, and potentially lower inflation, when it meets in February," he said at a briefing in Sydney last week.

He added that a stronger Australian dollar due to the surge in commodity prices could hamper the economic rebalancing, and that Macquarie’s risk case sees further cuts, with rates falling as low as 0.5%.

This is a possible reality that Westpac's chief economist Peter Evans is against. "The policy mix over the last five years has been to slash interest rates thereby putting upward pressure on household debt despite its already excessive starting point," he said. "It appears that the Reserve Bank is no longer attracted to that policy mix ... The government should not look to the RBA for a “short term” fix by further boosting household debt with even lower rates."

But McIntyre conceded: “A lot would need to go wrong, and a lot would need to be done domestically for the RBA to cut below 1%."