The Reserve Bank left their official cash rate on hold for a record two years in their August 2018 meeting. While growth may be marginally higher and while Central Banks in other countries have commenced their tightening cycles and/or reduced or eliminated quantitative easing, the RBA has deemed that conditions are not yet ripe to commence a tightening cycle.
While the minutes may be more explicit, reasons may include relatively low inflation and wage growth, falling property prices, high levels of extant debt, the muting of the construction cycle, consumer uncertainty and reduced savings rate.
That some banks have already effected ‘out-of-cycle’ interest rate increases reflects the nature of the banking industry and their respective reliance on off-shore capital markets, where interest rates are rising. It also reflects APRA’s efforts to curb lending growth with their increased reserve ratios, stricter credit growth monitoring, lower LVR risk paradigms, the refocus on and increased scrutiny of investor and interest only loans (both of which have become more expensive), and higher lending standards (in large part reinforced by the Royal Commission).
Some economists argue that the next RBA move should be to effect another cut to reinvigorate a languid economy with spare capacity. The marginal benefit of another interest rate cut may however not be enough to encourage sufficient economic activity to compensate for disaffected consumers. There would also be a commensurate impact on the AUD which, while benefiting exporters, would do little for the very banks importing capital from off-shore markets to on-lend to consumers – with the additional cost built in to a higher interest rate. Oh, the complexities we weave…