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Interest rates in Australia – global influences

The Reserve Bank of Australia left the cash rate unchanged at its April board meeting, saying current monetary policy settings were appropriate. It stressed the global economy was continuing to grow, albeit at a slightly slower pace than expected, while conditions have become more difficult for a number of emerging economies.

There is little to suggest the RBA will change its monetary stance – and rates are expected to remain on hold throughout the rest of 2016. The RBA’s accompanying statement had a positive tone, especially around the domestic economy, where it stated, “there are reasonable prospects for continued growth”. This is despite what’s happening in the manufacturing sector and the decline in mining investment.

One of the most important aspects of the statement is the RBA’s view on the Australian dollar. The RBA wants to see the dollar fall further, but over the past few months it has been strengthening. Since the March meeting, it has risen from USD 0.715 and exceeded USD 0.765 just before the April Board meeting.

 

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RBA Governor Glenn Stevens recognised that the dollar had risen but partly attributed this to monetary policy events overseas.

Globally, the RBA continues to closely watch a number of factors including the effects of negative interest rates in Japan, quantitative easing in the United Kingdom and the cautious approach to rate hikes being taken from the Federal Reserve.

At 2%, Australia’s cash rate is at record lows. However, it’s considered high compared with other countries, especially those with negative rates. There are six central banks that have introduced negative rates, including the European Central Bank and the Bank of Japan. Deposit rates now range from minus five basis points in Hungary to minus 125 basis points in Sweden.

A report issued by the International Monetary Fund in early April found that a move to negative rates would help deliver extra monetary stimulus and ease lending conditions.

 

United States

But the United States is where all the attention is with regard to interest rate movements. After nine years, the Federal Reserve lifted the Fed funds rate last December by 25 basis points, to an effective interest rate range of 0.25% to 0.5%. While initially four rate rises were predicted for this year, this has been revised downwards.

One of the reasons for this is the continual global economic gloom and the dovish comments from Fed chair Janet Yellen.

 

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In the first week of April, Yellen said that the decision to start raising rates last December wasn’t a mistake and so more tightening this year is “appropriate”. She added that the US is an economy on a “solid course, not a bubble economy”.

But the minutes from the March Federal Open Market Committee meeting released on April 6 show that the Fed is taking into account more than just US factors – it is also paying an increasingly close level of attention to the global economy.

There are a number of reasons for the US to lift rates this year, not least the slowly improving US labour and housing market. There is no pressure coming from inflation – CPI rose 1% year-on-year in February, down from the previous month’s 1.4% level. And in March, unemployment rose to 5%, a result of more people looking for work.

This data is likely to boost the case for further rate increases although the Fed says the pace of them will likely slow this year.

 

United Kingdom

Meanwhile in the UK, the bank rate has been left unchanged at 0.5% for the past seven years, with projections it will remain at this level until 2020.

What’s happening in China, particularly with its turbulent stock market, is a key reason behind the UK keeping rates on hold. UK growth has also been weaker and there was deflation last September – although inflation is back and was 0.3% at the last measure. The falling oil price is also feeding into the reluctance to increase rates.

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Brexit – i.e. the UK potentially deciding to leave the European Union – is also creating uncertainty and these factors have led to analysts moving the first rate rise further into the future. Initially, a rate rise in early 2016 was predicted following the US’s move in December but this view has now been moderated, with analysts saying there may be one or two later this year after the Brexit vote.

However, the Bank of England’s chief economist, Andy Haldane said last year that the case for the UK raising interest rates was “some way from being made” and that negative rates may be needed.

 

Meanwhile, back in Australia …

While our 2% cash rate looks good compared with negative rates, if the dollar keeps rising, the RBA does have the option of cutting rates further – although it would weigh up this action against that of stimulating property prices.

But while the cash rate is expected to remain on hold throughout 2016, this doesn’t necessarily mean mortgage rates will do the same. The Bank of Queensland was the first bank this year to impose an out-of-cycle increase in early April and it is expected that other lenders will do the same. The effect that this has on the economy may provide a strong argument for the RBA to cut rates, meaning home loan rates may just end up where they are!

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Gayle Bryant

Gayle has been a financial and business journalist and sub-editor for almost 30 years. She has written for a wide range of newspapers, magazines, custom and trade press and websites. Gayle’s articles regularly appear in the Sydney Morning Herald’s small business section and the Australian Financial Review’s special reports section.

The opinions expressed in this article are the opinions of the author(s) and not necessarily those of Homeloans Ltd.