Terry McCrann: Interest rates are not moving this year — or into 2021
Have interest rates bottomed out? The Reserve Bank’s latest decision shows there is a real chance it has made its last cut. And that is a good thing, writes Terry McCrann.
Terry McCrann
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The Reserve Bank left its official interest rate unchanged, as I told you it would a week ago.
More importantly, it is expecting to leave it unchanged pretty much into the foreseeable future.
That means not just through this year but into 2021 as well.
That was made clear by the relatively upbeat (latest) forecasts revealed by governor Philip Lowe on Tuesday.
Growth in the economy of 2.75 per cent this year, strengthening to 3 per cent next year, and the jobless rate easing to (a little) below 5 per cent.
Importantly, the RBA now sees ever-so-slightly higher inflation — at about 2 per cent for the immediate future, as against the 1.8 per cent to 1.9 per cent that it was last forecasting.
The difference might seem trivial, and it is. But, the 2 per cent is the bottom of the RBA’s — formally mandated — inflation target range.
Further, as I explained with the CPI figures last week, inflation will hit 2 per cent in the current March quarter.
This leaves the RBA free to think about rates totally in the context of the strength of the economy.
While those forecasts show that it’s relatively upbeat, they are built to some extent on hope — hope that consumer spending will pick up on the back of strong jobs growth, some strengthening in wages and of course improved household cash flows thanks to last year’s rate cuts.
We will get an important – if somewhat “yesterday” — pointer to that on Thursday with the December retail sales.
So what about the bushfires and the coronavirus?
First, the RBA was not going to rush to a rate cut to try to offset the negative impact of both on the economy, even though it fully expects them to have a significant combined impact through (at least) the March quarter.
For two reasons. It expects the negatives to unwind fairly quickly — with rebuilding after the bushfires and the return of people and business flows as the virus eases.
But also because lower interest rates would be of very limited help anyway.
It is important to make a very big point: the RBA will continue to very actively monitor and assess in real-time how the economic and financial dynamics of the virus do develop; and whether its positive forecasts for the economy prove accurate.
It believes they are on firmer footing than the ones of a year to 15 months ago, where frankly, it missed the slowdown in consumer spending — forcing the RBA to the mid-year U-turn and the three rate cuts.
Although it is more confident of its outlook this year (excluding the virus), it does have the added left-field uncertainties of the virus and it will be prepared to pivot on the proverbial dime.
So, various key statistical data will pay very careful watching — the jobless numbers, retail sales and other measures of consumer spending, wages and construction in particular.
Clearly, much of this will be spelt out by governor Lowe when he delivers a speech at the National Press Club in Sydney on Wednesday.
As I wrote last week, the RBA has essentially got what it wished for.
Let’s hope the rest of us now get what we should be wishing for (if we are sensible) — no further cuts and indeed, at some point, rate rises.
Very simply, any further rate cuts would tell us the economy was in deep, deep trouble.
The first rate rise will be like the first robin in (an economic) spring.
As I concluded: come on robin.