RBA Governor Glenn Stevens has outlined the central bank’s current view on the interest rate outlook, with further indications that the “emergency setting” will not be in place for too much longer. He added that Australia has been extremely lucky to have avoided the worst of the global economic storm, with avoidance of zero interest rates important to our future growth.

“(It was) immeasurably to Australia’s advantage that, however we have arrived at where we are, that we do not find ourselves with the overnight rate at zero,” he told the Senate Economic References Committee, which is looking into the government’s stimulus measures. “I’m not saying that countries that are doing that are doing the wrong thing, but it is much to our advantage that we find ourselves not in that place.”

Australia’s cash rate, the basis for interest rate settings by financial institutions, was slashed from 7.25 per cent to just 3 per cent between September 2008 and April 2009 but the RBA’s decision to not cut rates further has been vindicated by strong economic data over recent months.

“I always felt myself that we should be prepared to do some more if needed and in fact we said publicly some months that we think this is OK for the moment we have scope to do more if that’s needed,” Mr Stevens said. “As it turns out it wasn’t needed.”

The RBA Governor maintained his assertion that the medium-term picture for Australia was sound with a need to unwind “both fiscal and monetary support … as private demand increases”.

“In the case of monetary policy, the Bank has already signalled that interest rates can be expected, at some point, to move off their current unusually low levels, as recovery proceeds,” he advised. “These adjustments back towards more normal settings for both types of macroeconomic policy are what should be expected during the recovery phase of a business cycle. Our most recently released set of forecasts assumes they occur.”

Mr Stevens confided that nothing had changed with regard to monetary policy setting despite the crisis, reporting that “the inflation targeting framework the Reserve Bank has been following for a decade and a half will guide adjustments to interest rates”. Market commentary has often focussed on factors like economic growth and unemployment levels, but it should be noted that the RBA’s main policy objective is to maintain “low and stable inflation over the medium term”.

Possible timing

The assertion by the Governor that rate movements “will be timely and ahead of a build-up of imbalances that would occur if interest rates were kept low for too long” has been seized by analysts as a sign that a rate hike or two is imminent. Indeed, some are saying a double hike (November followed by December) is likely, with credit markets all but factoring in a hike in November.

A November hike could make sense as their Board meeting falls on Melbourne Cup day. As such, it allows the RBA to confine any news of a hike to the business pages rather than the front page thanks to the Melbourne Cup dominating the headlines. However, there is still is a lot of water to flow under the bridge before then, with inflation data in late October crucial to any RBA decision. A higher than expected reading could see predictions of two o.25 per cent rises before year’s end come true while a lower figure could yet see the RBA hold off until February (or beyond if economic conditions deteriorate unexpectedly).

A hike at their Board meeting on the first Tuesday of October remains unlikely due to some mixed data in recent weeks.