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By Sophia Rodrigues
SYDNEY (MNI) - The direction for the Reserve Bank of Australia's cash rate
remains to the upside and any rise in lending rates due to tightening in
financial conditions may delay the move but not change the course.
This was a signal from Governor Philip Lowe in a speech in Perth earlier
Wednesday, where he specifically said that the next move for the "cash rate" is
more likely to be up, rather than down.
In all recent instances, Lowe has talked about the next move for "interest
rates" as more likely to be up, rather than down.
"Cash rate" and "interest rates" are not interchangeable because the former
refers to the RBA's policy rate and the latter refers to the overall structure
of interest rates in the economy. While the cash rate certainly has an influence
on interest rates, there could be other factors that impact on the overall
interest rate structure, even as the official cash rate remains unchanged.
In recent weeks, financial conditions have tightened in Australia as
short-term wholesale funding costs rose due to an increase in U.S. short-term
money market rates.
There is growing concern that if this escalates further, it would lead to a
widespread increase in lending rates compared to one or two isolated instances
Because the RBA pays close attention to the structure of interest rates in
the wider economy, any rise in lending rates would limit its ability to raise
the cash rate. And any sharp rise in lending rates could even force them to cut
the cash rate.
But Lowe has dismissed the possibility of the cash rate going down.
This may be because he remains confident that any tightening in financial
conditions would not escalate enough to cause a sharp rise in lending rates. And
any smaller rises would fit in with the current progress in the economy and only
delay the first hike in the cash rate. Therefore, the direction of the cash rate
still remains up.
--RATE HIKE SHOCK
This was possibly the reason why Lowe acknowledged in the speech that an
increase in the cash rate will come as a shock to some people, as the last rate
hike was more than seven years ago.
Lowe reminded that the most likely scenario in which interest rates are
increasing is one in which the economy is strengthening and income growth is
also picking up, which may be a hint that there could be scenarios where
interest rates go up even when such progress hasn't been made. That would be the
one where tightening financial conditions cause some rise in lending rates.
What Lowe made absolutely clear is that he is committed to wait and see if
the economy make further progress in its growth, employment and inflation goals
but that commitment doesn't mean he is prepared to lower the cash rate -- at
least he doesn't see that as a possibility now.
--MNI Sydney Bureau; tel: +61 2-9716-5467; email: firstname.lastname@example.org