Monday, February 04, 2013

Rates steady Tuesday. Here's why:

The Reserve Bank board is set to take a breather Tuesday after slicing almost $2000 from the annual cost of servicing a typical mortgage over the past year.

At their first meeting this year board members will be told they can afford to wait longer before assessing the impact of their two most recent cuts in October and December.

Those cuts sliced a further $75 from the monthly cost of repaying a $300,000 mortgage, and would have sliced off $94 had the banks fully passed them on. Over the past year the Reserve Bank cuts that have been passed on took $161 off the monthly cost of servicing a typical mortgage.

The Bank’s cash rate is now just 3 per cent - the lowest on record. The Bank believes any proposals for cuts from here on require a stronger and stronger justification as they would take the cash rate further and further away from normal.

Overseas developments in the two months since the board’s last meeting provide no such justification. The United States has survived negotiations over its so-called “fiscal cliff” and is on track to successfully navigate negotiations over its debt ceiling. British economic growth has turned negative, but no more so than expected. China’s outlook is improving, and Japan has new government keen to restart economic growth.

If sustained the latest boost in the iron ore price will help rather than harm the Australian economy. But the Reserve Bank expects it to fade and sees no signs of mining companies bringing forward or restarting stalled projects. It expects the Queensland floods to have only a minor impact on coal exports.

At home it sees tentative signs consumer confidence is lifting... House prices are climbing again, but slowly. Although the unemployment rate is climbing, the increase is modest. The high dollar is weighing on business confidence.

The latest inflation figures give the Bank plenty of room to act. Notwithstanding the introduction of the carbon tax Australia’s official rate of inflation has slipped to an unusually low 2.2 per cent, well below the centre of the Bank’s 2 to 3 per cent target band. But in the absence of new bad news from overseas or a deterioration in the Australian economy it can’t see a reason to act.

The Bank stands ready to cut rates again as soon as conditions worsen or developments such a further increase in the Australian dollar threaten Australian businesses, but it is prepared to wait until it sees the evidence.

The Coalition Sunday held out the prospect of prolonged economic uncertainty saying it would not release its costed election policies until August, ten days into the campaign for the September 14 election.

The declaration, by shadow assistant treasurer Mathias Cormann appeared to constrain a promise by opposition leader Tony Abbott to “release our costings after the government releases theirs, after the Budget and before polling day”.

Senator Cormann told Sky News the Coalition would wait until the Treasury released its pre-election fiscal outlook ten days into the official campaign.

“There is nothing unusual about that,” he said. “It will be in good time before the next election, after we know what the true position of the budget is based on advice from the treasury secretary and not Wayne Swan who hasn't got a very good track record. We will stick to our timetable, we will not be distracted.”

In today's Sydney Morning Herald and Age

Related Posts

. December: The big four can pass it on, and if we have to we'll cut again

. November: No cut. It's today's favourite

. October. Why the Bank cut. The resources boom is about to peak