A full calendar year without change has happened only three times previously since the cash rate target was adopted in January 1990 - in 1995, 2004, and 2014. The official interest rate was last moved (downwards) in August 2016. In fact, the Bank now has been inactive on the policy rate for 15 straight Board meetings, just shy of the record stretch of 17 straight meetings established in 1995-96. Back then, though, the cash rate stood at 7.5%.
The statement announcing today’s decision sounded very familiar and remained constructive, particularly on the global economy. The commentary again mentioned improving conditions overseas, including in China, and reinforced the expectation that Australia’s economy would grow by around 3% in the years ahead. The discussion on investment and the local labour market also sounded upbeat, with job growth strong and unemployment declining. As before, there was no explicit guidance on what might happen with official interest rates next year.
There were only modest changes in the text today relative to the statement made back on Melbourne Cup day. First, there was an admission that monetary conditions had tightened overseas, which perhaps is a nod to the fact that the Bank of Korea joined other central banks in raising interest rates last week. Second, the discussion on the domestic labour market for the first mentioned emerging skill shortages. Finally, the previous reference to a higher exchange weighing on output and employment was removed. None of these changes is material for the outlook.
The RBA board does not meet in January, so the next gathering of policymakers will be on the first Tuesday in February. A lot can happen over the summer months, particularly overseas, but it’s very unlikely the board would be inclined to adjust policy early in the New Year. For what it’s worth, futures market pricing implies that the cash rate won’t rise until February 2019 (see chart). If realised, two consecutive calendar years of inactivity would be unprecedented, but a lot of water needs to flow under the policy bridge between now and then.
In the meantime, there is an interesting debate going on beneath the surface. Some economists, including former RBA board members and those at the well-regarded OECD, believe the RBA should be raising interest rates sometime soon to help curb growth in credit. The majority of local economists, though, believe the cash rate probably will be steady until at least the second half of 2018. The AICD expects policy normalisation to start sometime during the second half of next year.