Daily Commentary BY THE CURVE TEAM –

RBA In No Rush On Rates

14th of September, 2017

In an interview yesterday, RBA Board member Ian Harper outlined exactly why the RBA is in no rush to make any changes to the current setting of monetary policy. Concern over the consumer was one of the key reasons that was reinforced by the latest consumer sentiment survey yesterday.

In his phone interview with Bloomberg yesterday, Harper was quite blunt in his assessment of the Australian economy and what it meant for the outlook for interest rates. On the economy he said that “As well as we’re doing, the Australian economy is still operating below its potential.” It is an important point that the RBA has repeatedly made mention of. As far as the implications for monetary policy, Harper was again quite frank, saying:

“So long as that is the case, why would anyone be suggesting tightening monetary policy when the economy is operating below potential? I mean hello?”

Harper also echoed sentiments we shared earlier this week in our monthly insights on the resilience of the consumer, who continues to battle headwinds on multiple fronts. After pointing out that “Consumption is two-thirds of gross domestic product,” Harper succinctly highlighted the risk consumers pose, saying:

“If households as a group were suddenly to decide that we really can’t afford this now, we’re going to start to slow up consumption to keep ourselves on an even keel, then that will certainly pull GDP growth away from where we want it to be.”

Harper is justifiably concerned given the outcome of yesterday’s Westpac Consumer sentient survey. While the index did show some improvement on the outlook for the economy, ongoing concerns over family finances continue to weigh in on the index. It printed below the key 100 level, indicating pessimists outweigh optimists, for the 10th straight month.

What would be of greater concern for Harper and the RBA as far as consumption goes, would be consumer’s response to the ‘wisest place for savings’ questions from yesterday’s survey. Almost two third of respondents prefer conservative options, such as deposits, superannuation or paying down debt. Those nominating property fell to a new 40 year low. In fact, more people favour paying down debt than property and shares combined.

While that sort of response is favourable from a financial stability point of view, that kind of mindset doesn’t bode as well for consumption, which as Harper pointed out, accounts for two thirds of GDP.

David Flanagan

Director - Interest Rate Markets