Yesterday, for the final time this year the board of the Reserve Bank of Australia (RBA) got together to discuss the official interest rate in Australia. And, as expected, they’ve decided to leave the it unchanged at 1.50%. That is the sixteenth month in a row they’ve decided to do that. That’s right, the official rate has not changed in nearly one and half years. That’s a long time.
As always, they released a statement at the same time to provide context around their decision and, as always, the propeller heads of finance trawled through it to find any changes in the RBA’s thinking from the previous month (I talked about why they do that last month).
The Role of the RBA
Remember the role of the RBA is to set the price of money (AKA the official interest rate) at a level which encourages the “right amount of spending” in the economy. They don’t want interest rates too low, as if money is “too cheap” people will borrow and spend too much, which could lead to prices going up too fast. But they don’t want money too expensive either, as if the rate of interest is too high, it could encourage people to save too much and spend too little. And like we keep saying, one person’s spending is another person’s income, so getting the level of spending right in the economy is super important for jobs and wages.
One of the key things which the RBA watches for to get a sense of how appropriate the “cost of money” aka the interest rate is, is the level of inflation in the economy. When inflation is low, it means there isn’t enough spending. When it’s high it means there is too much. For what it’s worth, the goldilocks level of interest rates is thought to be around 2-3%.
A key reason the RBA has left interest rates at such low level for such a long time is because inflation has been well below where they want it to be.
So has anything changed?
Who better to ask, than Barclays Bank. You may remember them from such fines as the 298 million USD one for helping the son of the President of Equatorial Guinea to illegally siphon and launder money out of his country, or the 450 million USD one for manipulating the price of interest rates to rip of their clients, or the 453 million USD one for manipulating the price of electricity to rip off consumers in California or the TWO POINT FOUR BILLION USD DOLLAR ONE for manipulating the price of different foreign currencies to rip off pretty much everyone. Yes, let’s ask them… So Barclays, has anything changed in the RBA’s thinking?
“On inflation, although the RBA did not flag upside risks, it did remove the reference to underlying inflation remaining low for some time. This we believe was probably the most important change in the statement, as the RBA noted that while wage growth remains weak, some sectors are starting to report difficulty in hiring workers with the necessary skills.”
Essentially what they are saying is the language of the RBA’s statement yesterday is almost identical to one in the previous month, except this time they’ve removed the reference to “inflation remaining low for some time”. What Barclays and the other propeller heads read from this, is that the RBA is getting less concerned about inflation being low, making them think that we may finally be approaching a turning point in the cycle, where prices and wages might finally start to increase. And if they start to increase enough, then it may mean we could see interest rates going up in the future.
What does that all mean for you?
Nothing for now. Interest rates aren’t changing anytime soon, but they are certainly more likely to be going up than down next year. So if you’ve got a mortgage and you’re paying a variable rate of interest, your repayments may start to increase next year. May. Not will. Something to think about.
And that’ s 5 minutes. Hope it helped.