10 August 2018
Bob Cunneen, Senior Economist and Portfolio Specialist
Source: Reserve Bank of Australia’s statistical tables F1 and F2.
Australia’s Reserve Bank of Australia (RBA) celebrated a second birthday for monetary policy this week. Australia’s key cash interest rate (blue line) has been held steady at 1.5% for the past two years.
This is a remarkably stable interest rate considering the twists and turns of the Australian economy over recent years. Essentially the RBA has held interest rates steady given competing forces confronting the economy. The mining investment downturn and sedate retail spending have made a case for lower interest rates. Conversely the Sydney and Melbourne housing price booms, infrastructure surge and stronger jobs growth have argued for higher interest rates.
Australia’s government bond market seems to be pricing higher interest rates over coming years. The two-year government bond yield has risen above 2% this year (red line). Given that this two-year government bond yield has typically led movements in interest rates over the past decade, this implies the RBA is set to raise interest rates. So from the bond markets perspective, the RBA is merely playing a ‘waiting game’ until the case for raising Australia’s cash interest rate becomes compelling.
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