The Reserve Bank won't be raising interest rates anytime soon. Here's why | Greg Jericho

Sure, employment is growing but wages aren’t and nor is inflation

Next month, should the Reserve Bank once again keeps interest rates on hold (rated a 100% chance in the market) it will mark 91 months – more than seven and a half years – since the RBA last raised the cash rate (in November 2010) from 4.5% to 4.75%. And despite warnings from the RBA governor that the next change in interest rates will likely be a rise, the latest housing finance figures suggest this current period without a rise is set to continue.

We are now experiencing the longest run without a rate rise in the RBA’s history – well beyond the 58 months during the mid to late 1990s when the RBA took the cash rate from 7.5% to 4.75%:

The current period is also the longest the RBA has sat on its hands. In May it will be 21 months in a row of the cash rate being steady at 1.5%. Since 1990, the RBA has changed the cash rate on average just under once every five months. So we are in not only an unprecedented period without a rate rise, but also one without any movement at all.

But if we look further back to beyond the period when the RBA was independent and set the cash rate, to changes in the standard variable home loan rate, we see that since the 1960s there have been more periods where rates are falling than where they are rising.

Generally, we have long period of rates going down, interspersed with short-sharp periods of rate rising. In this context, the period in the early 2000s up to the financial crisis hit was an abnormally long period of rates rising:

Given this period began soon after John Howard promised to keep interest rates at record lows, it suggests hubris in politics will tend to come back to bite you.

But it also shows that given interest rates rises are generally associated with strong economic growth and rising inflation, and rate falls are associated with weaker growth, the mining boom period was clearly an aberration in our economic history.

By and large monetary policy is mostly geared towards helping economic growth improve, rather than hindering. It also shows that given the short period rate rises, generally it doesn’t take many rate rises to hit the economic breaks, whereas it is much harder for interest rates cuts to both start and keep the economy going.

Last week, the governor of the Reserve Bank caused a bit of a kerfuffle when he told an audience in Perth that “it is more likely that the next move in the cash rate will be up, not down, reflecting the improvement in the economy”.

He also noted that since last increase in the cash rate was more than seven years ago, it would be “a shock to some people”.

Indeed. Had you taken out a 30-year loan in November 2010, you would now be a quarter of the way into it without having had to worry about the Reserve Bank lifting rates.

The good news is the “shock” is still a way off yet. Lowe was quick to note that “it is worth remembering that the most likely scenario in which interest rates are increasing is one in which the economy is strengthening and income growth is also picking up”.

And we’re not there yet.

Yes, employment has been good, but incomes not so much. As it is, the market barely reacted to his statements, given he was mostly just saying what everyone already knew.

For most of this year the market has been pushing out the time it next expects the cash rate to rise. In January, it was predicting one by the end of this year, now it suggests the middle of next year is more likely:

One reason is that there is little sense that inflation is about to take off in any serious way. The inflation expectations of union officials and market economists are up from where they were in the middle of 2016, but have not been rising for nearly a year:

And similarly the housing market is not showing any signs of needing to be cooled.

Reports are that across the nation, but especially in Sydney, auction clearance rates have been falling – less than two-thirds of Sydney auction listings sold last weekend, well down on the more than 80% that were clearing a year ago.

This again should be no real shock. The growth of housing finance has been very weak for around a year now.

The latest housing finance figures released last week by the Australian Bureau of Statistics saw finance stay flat in February. Yes, in seasonally adjusted terms there was a 1% increase, but that can be very noisy:

The trend growth figures show both owner-occupier and investor finance displaying little signs of life:

And the annual growth figures show that we have now had two months in a row where the value of housing finance is below what it was 12 months earlier:

Certainly such figures would make it very odd for the RBA to think interest rates need to rise. Why seek to cut growth that might be visible in employment numbers, but not in wages or prices?

So for now the long period of doing nothing looks set to continue, and unless the latest inflation figures out next week surprise us, the only shock for a rate rise would be if it were happen sooner rather than later.

  • Greg Jericho is a Guardian Australia columnist


Greg Jericho

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