RBA in ‘uncharted territory’ on rates

With the cash rate at an historic low, the Reserve Bank is in “uncharted territory” as it seeks to boost the non-mining parts of the economy, an economist says.

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After May’s quarter of a percentage point rate cut, the RBA left the official cash rate at two per cent in June, noting that lower interest rates were helping to support borrowing and spending.

However, a key concern for the central bank remains weak business investment, which has failed to rebound as mining investment has unwound.

Speaking on Friday, JP Morgan fixed income strategist Sally Auld said the RBA was currently in a unique position, describing the global economic environment as “much more fragile than it has been at any time in the last couple of decades”.

“It’s a lot more uncertain,” Ms Auld said, adding that she had her fingers crossed the US Federal Reserve would hike the Federal Funds Rate in September.

An interest rate hike in the US would put downward pressure on the Australian dollar, and make exports cheaper and increase the competitiveness of locally-made goods with imported products.

She said Australia’s central bank was seeking to support growth in the non-mining parts of the economy as the Chinese economy slows, the currency remains strong, households carry large amounts of debt, and with fiscal repair still to be done.

“There’s this whole confluence of factors that make economic policy-making in Australia quite difficult at the moment,” Ms Auld told the 2015 Corporate Governance Forum.

“The RBA to a certain extent finds itself in uncharted territory.

“They need to generate a set of financial conditions that is loose enough to engender some above trend growth in the non-mining economy.”

She said a key issue for the central bank was to hit the right mix of currency value and interest rates.

“Now we’re at two per cent on the cash rate and 76 US cents on the currency, and I think the RBA are crossing their fingers,” she said.

“They’re finding their way in the dark a little bit.”

It was likely that in six months time the RBA would assess the economy and cut rates again, if needed, Ms Auld added.

“They can’t sit by and watch an economy that seems to be mired in a sort of permanent state of sub-trend growth and do nothing.”

The market is currently pricing in a slightly higher than 50-50 chance that the RBA will cut the cash rate before the end of the year.

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