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Has the Reserve Bank cut cutting rates? Interest rate review

Well the answer might lie in watching the Aussie dollar! Recent interest rate cuts designed to depreciate the dollar are under threat with fears of over- stimulating the housing market.

Daniel Shillito by Daniel Shillito
09-12-2013 12:28
in News
reserve bank of australia

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reserve bank of australia

THE Reserve Bank has kept rates on hold this December and consistent with its most recently published Board minutes relaxed its previous bias towards decreasing rates and definitely appears to be adopting a neutral approach, observing that previous rate cuts were now having the desired effect.

Today’s decision even states that globally “financial conditions remain very accommodative” and that Australia’s economy although tracking a little below trend, is experiencing well contained inflation and employment conditions. The Bank also notes there is an increased demand for finance by households and “continuing evidence of a shift in saver’s behaviour in response to declining returns on low-risk assets” (i.e. money getting out of the bank and into property and shares..!)

The bank concluded in November the Aussie dollar was now 10% below its peaks. It’s interesting to note that on the actual day Board minutes were released last month, on November 19, the dollar actually fell by half a cent! (albeit momentarily, before recovering to around US 94 cents the same day). It stands today at 91 US cents approximately.

We might conclude “between-the-lines”, the Bank is comfortable that the Australian dollar has at least adjusted downwards or trended downwards since its surprise rate cut in May this year. At that time, before the cut, the dollar hovered around 1.02 USD.

In May we wrote about how the Reserve bank’s focus shifted to influencing Australia’s exchange rate, despite reasonable economic conditions. When the Board further cut rates in August, we can conclude the Bank felt comfortable doing so given the reasonably low inflationary outlook that continued since May, and so continue its focus on shifting the exchange rate (downwards).

However that scope has appeared to have been ‘lost’ or severely challenged, with recent housing market indicators mentioned briefly in this month’s rate announcement. It is true that Sydney median house prices have risen 12% over the last year, whilst median house prices across Australia have risen 8% overall.

The Aussie dollar has moved from USD 1.02 before the rate cut in May, down to US 92 cents before the August rate cut. After the August cut the rate actually moved to a peak of 96 cents on November 1, and it has retracted these gains to stand today at approximately 91 US cents.

Although the Bank is still concerned that the dollar is uncomfortably high, I suspect they are slightly happier today.

For those looking to move home, or invest or transfer some funds down under, against the pound over the same period (Since May) the Aussie dollar has depreciated from 1 GBP = 1.50 AUD to 1 GBP being approx. 1.80 AUD today!

Daniel Shillito is a Financial Adviser, CPA and Expat specialist at Aussie Finance and Property Group, qualified both within Australia and throughout Europe. Views expressed here are his own. Daniel can be contacted at [email protected] or Ph. 020 3239 0479 or visit www.aussiefpgroup.com 

Tags: business newsExpat Finance: with Daniel ShillitoExpat Lifefinanceinterest ratesMoneyReserve BankReserve Bank of Australiataxtax and finance
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