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RBA may react to tighter financial conditions - Westpac

FXStreet (Bali) - Bill Evans, Chief Economist at Westpac, notes that while the RBA may have to take action in response to tighter financial conditions in Australia, the core view remains for rates to remain on hold in both 2015 and 2016.

Key Quotes

"History has showed us that banks tend to move close in time, but in differing amounts, when operating out of cycle with the Reserve Bank."

"This reflects the common nature of the funding and regulatory shocks that drive such decisions. However it is by no means certain that history will necessarily repeat itself."

"History also showed us that even when the banks tightened and the Reserve Bank had an explicit easing bias it still took 3 board meetings to decide to offset the effect of the banks’ moves."

"Our position is that the case for the type of net easing we saw in 2012 is not strong but the Reserve Bank, which targets retail interest rates, may decide at some point to offset any tightening by the banks to restore retail rates to those prevailing at the time of the October Board meeting when the Bank was comfortable with financial conditions and policy settings."

"If we are to predict a near term rate cut on the basis of an unexpected tightening of financial conditions then we need to assess the full extent of that tightening and signs of its impact on the real economy. To date that information is not yet available."

"For now, we retain our call for rates to remain on hold in both 2015 and 2016."

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