Rate hikes unlikely to affect cash rate decision, says RBA govenor

by |
The Reserve Bank has said it remains open to further cash rate cuts, however, the recent of ‘out-of-cycle’ mortgage rate hikes are unlikely to affect its decision.

In an address to the 2015 Economic and Social Outlook Conference, RBA govenor Glenn Stevens said the central bank isn’t ruling out further cash rate cuts as the economy continues to rebalance post-mining boom.

“It would be good if the growth was a bit stronger, but nonetheless over the past year the non-mining side of the economy has generated respectable growth in employment. The ‘rebalancing’ is occurring. It isn't as seamless as it would be in an ideal world, but we don't live in such a world,” he said.

“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.”

Speaking about the recent increases in mortgage interest rates and whether that could affect future cash rate decisions, Stevens said the RBA had cut the cash rate as interest rates rose in the past.

“One such occasion was in May 2012, when the Reserve Bank Board wished to ensure that the economy received a worthwhile stimulus from a policy easing after a period in which lending rates had tended to increase even while the cash rate had been steady,” he said.

“The Board wanted to make sure that financial conditions would move to a clearly easier position than they had been when the cash rate had previously been lowered, five months earlier. So on that occasion the Board decided on a larger than normal reduction in the cash rate.”

However, Stevens says the recent interest rate hikes by many major and non-major banks are unlikely to weigh on its mind this time as they are rising from a much lower base.

“Measuring across the total loan book, the recent actions are the equivalent of roughly half of one 25 basis point monetary policy change. They take back perhaps a quarter of the extent of interest rate easing seen since the start of this year, and a smaller proportion of the total easing in lending costs seen over the past two years. 

“For mortgages, this increase is from the lowest rates that any current borrower will have ever seen.”