'The next move is probably lower'

RBA Governor Stevens has just delivered a speech in which signalled that while monetary policy is aiding economic recovery, the next move in interest rates in Australia would be an easing.

Here’s the paragraph

Monetary policy is contributing to that rebalancing, consistent with its mandate, with a very accommodative stance. It seems likely that an accommodative stance will be appropriate for some time yet. Were a change to monetary policy to be required in the near term, it would almost certainly be an easing, not a tightening. The rate of CPI inflation is clearly no impediment to easing. The housing market may be calming, lessening risks from that source, though by how much and how persistently we cannot yet know.

That’s an important intervention in the interest rate markets from the Governor. It’s important because it can serve to relieve or mitigate any US based upward pressure Australian interest rates are currently experiencing because US interest rates are rising as the Fed moves toward a hike.

It’s also a none-to-subtle intervention in the foreign exchange markets to remind real money investors, who have again become enamoured with the Australian dollar, that the Fed and RBA have divergent interest rate paths ahead of them

On the topic of rising interest rates the Governor spoke directly about the recent increase by the Majors, and more recently smaller banks, to increase mortgage rates.

The Governor highlighted that the question for the RBA board was “whether the recent changes in mortgage rates result in an effective set of financial conditions that is ‘too tight’ for the economy.”

To that end he made the point that “over the course of 2014 and 2015, effective rates on most loans tended to decline by more than the cash rate, reflecting both declining funding costs and increased competition to lend.”

For fixed rate mortgages and many business loan rates the fall was quite marked. The average rate on outstanding business loans, for example, fell by over 90 basis points during a period in which the cash rate fell by 50 basis points. Even for floating rate mortgages, rates had fallen a bit more than the cash rate.

On balance he said the moves, all of the various actions on owner occupied, fixed rate, and investor loans, were around “roughly half of one 25 basis point monetary policy change” and perhaps a quarter of the easing in 2015 and an even smaller proportion of the easing over the past 2 years.

Certainly this analysis and his comments that “this increase is from the lowest rates that any current borrower will have ever seen” and the fact that there are still “a number of mortgage products with rates not much above 4 per cent, even a few advertising a ‘3’ before the decimal point,” clearly signals that for now the RBA won’t be easing because of the banks moves.

Nor does the fact that the Governor has opened the door on an interest rate cut mean he will necessarily cut rates.

The Governor noted the improvement in business surveys which “outside mining have been slowly improving, not deteriorating.”

So on balance Stevens said the bank’s move to increase interest rates independently of the Reserve Bank wasn’t compounding a deteriorating trend in economic conditions. There were risks that “the ‘shock’ value of the rises in mortgage rates itself lead to a significant change in that trend, gentle as it is, of improvement.” But for him that’s “a bit of a leap.”

In the end the door is ajar and as the Governor highlighted the inflation rate is “no impediment to easing.” But a rate cut is still no certainty.

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