What we have seen at the start of October 2016, was that the Reserve Bank of Australia (RBA) left the interest rates on hold and the benchmark (cash) rate was maintained at 1.5 per cent. It was highlighted that policy if kept at the unchanged stance would be consistent with sustainable growth in the economy and this would help achieving the inflation target over time. This move by RBA was in line with the expectations of the market. RBA has also given the sign that there is an utmost need to first invest time to observe the economy along with financial conditions before looking at any further interest rate cuts. RBA also commented that higher commodity prices have supported a rise in Australia’s terms of trade and financial markets have continued to function effectively.
Cash rate (Source: Reserve Bank of Australia)
Recent commentary by the treasurer, Scott Morrison, also indicates his alignment of thoughts with RBA’s move while Mr Morrison opposes any more interest rate cuts by the Reserve Bank of Australia. He specifically mentioned that the monetary policy seems to have achieved the state where it has already “exhausted its effectiveness” while showcasing that “its ability to impact and influence is diminishing”. With time, the market now sees most of the central bank’s governors having the same opinion that monetary policy kind of subsides the economic issues at a temporary level instead of providing a permanent solution. The recent forecast by HSBC entails that cash rate is expected to remain on hold at 1.5 per cent. On the side note, ratings agency, Standard & Poor’s has indicated that the Government needs to make an attempt towards budget savings and try to preserve Australia’s AAA credit rating. Thus, many now believe that it is time for the government to take steps in order to boost incomes and lift living standards. It is to be otherwise noted that with reduction of interest rates to unparalleled low levels, bond yields have turned negative and this reflects investments being made in perilous assets, which typically is not a healthy sign for investors.
With regard to interest rates, the expectations might change while market is watchful of the inflation data set to be released in second half of October 2016. This may impact the Reserve Bank’s decision going forward.
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