Key inflation figures and a speech from the RBA boss came under the microscope this week as economists pondered the outlook for interest rates and share prices.
AMP Capital chief economist Shane Oliver said the share market had benefited from low interest rates and were in a cyclical bull market.
The first stage of such markets is an unwinding of cheap valuations helped by low interest rates, the second is driven by higher profits, while in the third share prices grow expensive as investor confidence becomes excessive.
The market is currently in the second phase, Dr Oliver said.
“We remain a long way from the sort of investor exuberance seen at major share market tops.”
Shares are no longer “dirt cheap”, but nor are they expensive, he said.
The durability of the low interest rates supporting this cyclical upswing in share price was put to the test twice this week – once in a speech from RBA governor Glenn Stevens on Tuesday and again with the quarterly inflation figures the following day.
ANZ economists Savita Singh and Justin Fabo said the governor’s speech highlighted monetary policy’s limitations.
They zeroed in on a comment from the governor, in answer to questions after his speech, that the RBA could resort to even lower interest rates to spur the economy if needed.
Even so, they described the RBA’s position as “comfortably on hold for now”.
Royal Bank of Canada economist Michael Turner said the absence of any focus on domestic economic of monetary conditions – at least in the prepared speech if not the later Q&A – suggested Mr Stevens was comfortable with the exchange rate and the level of interest rates.
“Moreover, there was no mention of tomorrow’s Q2 CPI (consumer price index) reading, which at the margin suggests that it may not be key in shaping the near term policy debate,” Mr Turner said.
“We remain comfortable expecting the 2.50 per cent cash rate to persist until Q2 ’15.”
That CPI reading on Wednesday turned out to be almost exactly in line with the RBA’s latest forecasts, although measures of underlying inflation were higher, if only fractionally, than the market consensus.
ANZ senior economist Riki Polygenis said trends in the data confirmed the ANZ economics team’s view, and were consistent with an outlook for moderate inflation.
“It does not appear weak enough to justify a rate cut,” she said.
“Equally, it implies little urgency for the RBA to wind back very expansionary monetary policy.”
ANZ’s economists expect steady rates until the first quarter of 2015, “with risks tilted towards a later start or a more protracted tightening cycle”.
HSBC’s Paul Bloxham pointed to a range of inflation measures stuck in the upper half of the RBA’s two to three per cent target band.
Accordingly, while the RBA is likely to be comfortable with its “accommodative” setting for the cash rate at 2.5 per cent, consideration of a further cut is “highly unlikely” in the near future, he said.
