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Weekly Economic Commentary

Weekly Economic Commentary

Categories: General, Commodities

There were no surprises from the Reserve Bank of Australia (RBA) last week with no change to monetary policy and the description of the global and domestic economies almost the same as last month. The neutral comment on monetary policy reflected the Minutes of the previous RBA Board meeting whereby no guidance was given either way on the future direction of rates.

The accompanying statement suggested a reduced probability of a further cut in the cash rate in the near term, with the November Board meeting now the likely earliest “live” meeting for a further move (after the next CPI data).

The combination of the August rate cut, the desire to see how business confidence responds after the election, the pickup in the housing market and asset values, plus the impending start of the US Federal Reserve tapering, suggests that the RBA is in no hurry to consider further changes to the cash rate. That said, financial markets continue to retain an easing bias with the probability of a rate cut before Christmas at 50%. The market is no longer pricing in a full 25 basis point rate cut going forward and is now pricing more than one full rate hike by the end of 2014.

The Election – finally over, for now.
The Tony Abbott-led Liberal-National Coalition took Government, winning a clear majority of seats in the House of Representatives at Saturday’s election – as was widely expected..

At the time of writing, the Liberal-National Party had secured 89 seats (more than the 76 required to take a majority) with the Labor Party (ALP) having secured 57 seats, the Greens one seat and Independents three seats. This is a much more decisive victory for the Coalition than for the Australian Labor Party in 2010. Due to the minority status of Government, the votes of Independents were required for the Government to move contentious legislation through the lower house.

The Senate results (only half of the Senators were up for election) will not be known for several days and possibly weeks, but will not change to reflect Saturday’s election results until July 2014. Given the clear majority won in the lower house, the extent of the Liberal Government’s power will be dependent on whether it has the numbers outright (unlikely as there are a number of minor parties likely to win seats) or with enough right-leaning cross-bench support (quite likely) to move contentious legislation through the upper house of Parliament.

Financial markets are unlikely to be affected by the election result as the outcome was widely predicted by opinion polls and betting markets. The Coalition, like the Labor Party, supports conservative fiscal policy, the independence of the Reserve Bank and Australia’s 2-3% inflation target. Traditionally equities and the currency seem to rally after an election and the Australian Dollar is up over half a cent from last Friday’s close already.



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