17 July 2017
Over the past week Australian shares were up 1.1%. In the US share prices were up 1.4%, shares in developed countries were up 1.8% and emerging market shares were up 4.4%. The Australian dollar increased by 3% to 78.30 US cents. The 10 year bond yield in Australia was stable at 2.72%. In the US, the 10 year bond yield slipped to 2.33%, down 0.08%. The oil price increased by 5.2% to 46.54 US dollars per barrel.
Each month the media speculates about whether the Reserve Bank of Australia (RBA) will change the official cash rate. It may surprise you that there has been no movements in interest rates for the last 10 RBA meetings. The official interest rate has remained 1.5% since the RBA cut it from 1.75% back in August 2016. By way of background, the RBA meets on the first Tuesday of every month (except January) and the resulting decision is announced the next day.
Is it strange that the RBA has left the cash rate unchanged for 10 months? Actually, no. The RBA has had many lengthy periods where it has left the cash rate unchanged. Last year the official cash rate was left unchanged at 2% for 10 months. The longest period of no change was in 1995/96 when the cash rate remained at 7.5% for 17 consecutive meetings. On average the RBA has changed the official cash rate less than one in every four meetings. The chart below provides a long term history.
RBA official cash rate1
So why does the RBA seem to change the official cash rate far less than what media speculation would suggest? This is hard to answer but I would suggest two reasons:
- The long term focus of the RBA on the achievement of stable and low inflation (2% - 3%) and strong employment. By comparison, news sells so the media has a bias to make news.
- RBA decisions incorporate the views of a nine member board, which includes both internal executives and independent members from industry. A well considered group decision is likely to be less volatile than one based on a single view.
In summary it is not unusual for the official cash rate to remain so stable. What is unusual is the current level of 1.5%, the lowest recorded level. This is part of a global phenomenon of extremely low interest rates, a result of the Global Financial Crisis, even though that was nearly 10 years ago.
David Bell | Chief Investment Officer