Playing the waiting game

Despite the cash rate going unchanged again this month the RBA could end the wait at any time.

The cash rate went unchanged again this month – so it remains at 2 per cent and has remained so for some time. Despite this holding pattern, it’s likely the Reserve Bank will have to make a move at some point this year. What we’ve seen in recent weeks are the deciding factors for this move becoming much clearer.

According to new figures from the Australian Bureau of Statistics (ABS) released last week wage growth has fallen to a record low of just 2.2 per cent a year. This is the lowest annual wage growth since the series started in 1998 and is expected to remain restrained because inflation is low and weak commodity prices are affecting our export industries resulting in downward pressure on wages.

At the same time we’ve seen a continued lack of investment in key industries like mining. While this challenge has been on the radar for some time – investment was predicted to fall by close to 10 per cent during the 15/16 financial year – no imminent solution is in sight. While housing construction is strong, especially in NSW, at the same time ABS figures show approvals for new housing developments experienced a drop of 7.5 per cent during January 2016 and this was driven mostly by a 9.1 per cent drop in approvals for apartments.

As for employment rates, these were looking strong through most of 2015 and were holding up until January 2016 when they experienced an unexpected slump. The total number of people with jobs fell in January by 7,900 when they had been expected to rise by 15,000. Employment rates are expected to slow further over the coming months.

These are all signs that point to a need for action in the future – but none seem severe enough to stimulate an immediate move. Perhaps for now the economy is holding in the balance, but a major shift in one, or all of these areas would encourage the RBA to take a different outlook. Historically, we know the RBA won’t be in any mood to make a knee-jerk reaction and will likely look at how things develop over a six month period.

The other wildcard this year is completely out of the RBA’s control – elections. Both here in Australia and overseas in major power houses like the US, elections bring elevated uncertainty about government, leadership, policy and change and makes for an interesting 2016.

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