The Reserve Bank of Australia’s decision to leave interest rates on hold this month now extends the period in which official interest rates have remained unchanged to 14 months.
The extended period of steady interest rates seems unusual to some exasperated market analysts, and has led some to suggest it’s a particularly boring period for “RBA Watching.”
It begs the question: is the latest period of steady interest rates particularly unusual?
A look at history suggests it is somewhat unusual, but not unprecedented. On current trends though, there’s a good chance the record period of steady interest rates set back in the mid-1990s could be broken early next year.
Since the RBA began publically announcing monthly interest rate changes in 1990, there have been six previous periods in which interest rates have remained on hold for at least 12 months. The longest period of steady interest rates was 19 months, between December 1994 and July 1996.
Only as recently as 2011, moreover, interest rates were left on hold for 11 months.
What’s normal? Note the average period in which interest rates have remained on hold since mid-1990 is 4 months, with a standard deviation of 4.5 months. So the current period of steady official interest rates is almost 2 standard deviations from the average.
In short, while it’s not unprecedented for interest rates to remain on hold for at least a year, it’s still relatively unusual. Of course, economic conditions are always changing, so even though the RBA has left policy on hold for a considerable time, it does not obviate the need to keep watching the economy very closely.
It will still take another 6 months of no change from the RBA for the record 19 month stretch of steady interest rates back in 1994-1996 to be broken. Based on the current economic outlook, that’s a very real chance, as it would require an interest rate move by April 2015.