TERRY McCRANN

Sunday Herald Sun - - Front Page -

WOULD a plunge or even just an ex­tended slide in the Mel­bourne and Syd­ney prop­erty mar­kets cause the Re­serve Bank of Aus­tralia to hold off rais­ing in­ter­est rates and maybe even switch to cut­ting them?

Sim­i­larly, on the other side of the Pa­cific, would a plunge on Wall St cause the Fed — the Fed­eral Re­serve, the US ver­sion of our RBA — to stop rais­ing its in­ter­est rate; and also, maybe, even think of cut­ting?

And what would a real and ex­tended trade war be­tween the US and China — not only the two big­gest economies in the world, but the two most im­por­tant di­rectly to us — do to both the un­der­ly­ing mar­kets and the rate de­ci­sions?

Dur­ing the week both our RBA and the Fed left their rates un­changed as al­most uni­ver­sally — in­deed, you could drop the qual­i­fier — pre­dicted and ex­pected.

The RBA did it at its reg­u­lar and idio­syn­crat­i­cally timed Mel­bourne Cup Day meet­ing — for­mally an­nounc­ing the “non-de­ci­sion” just 30 min­utes be­fore they were off, if any­one out­side deal­ing rooms and me­dia of­fices no­ticed.

To di­gress, this was in con­trast to what had be­come an al­most reg­u­lar pat­tern in the early decade of the cen­tury, when Cup Day was al­most the favourite day for the staid bankers in Syd­ney to throw a bit of a curve-ball into Mel­bourne fes­tiv­i­ties and to steal some of the thun­der by an­nounc­ing a rate rise at that pre-race 30-minute mark.

Across the Pa­cific, two days later the Fed fol­lowed suit.

But it, of course, got to an “un­changed Novem­ber rate de­ci­sion” by a very dif­fer­ent route to the RBA. This is crit­i­cal to un­der­stand­ing what will drive them.

The Fed got there by hav­ing pre­vi­ously slowly but steadily raised its rate eight times over the past three years, since it started back in De­cem­ber 2015. It started, of course, from zero, so it’s now at 2-2.25 per cent.

It has a range whereas our RBA has a spe­cific rate.

In con­trast, the RBA “started” — to leave it un­changed — all the way back at the last meet­ing of the pre­vi­ous gover­nor Glenn Stevens in Septem­ber 2016.

Against, in con­trast to the Fed, the RBA “started” at a rate of 1.5 per cent (af­ter Stevens had cut it the pre­vi­ous month at his sec­ond­last meet­ing).

The two big con­se­quen­tial dif­fer­ences are that the Fed rate rises have run par­al­lel with a boom­ing Wall St. The Dow has leapt more than 50 per cent over that pe­riod — de­spite rate rises that are sup­posed to be neg­a­tive for the mar­ket — with most of it com­ing af­ter the elec­tion of Pres­i­dent Don­ald Trump.

Not only have our steady rates done vir­tu­ally noth­ing for our stock mar­ket — it’s up barely 10 per cent over the two years and that’s re­ally just be­ing dragged up by Wall St — but it’s also run par­al­lel with a fall­ing prop­erty mar­ket.

Again, his­tor­i­cally prop­erty booms are usu­ally ended by ris­ing rates — and some­times, like in 1990, by dra­mat­i­cally ris­ing rates.

Now the Fed in its state­ment ex­plic­itly com­mit­ted to fur­ther rate rises. Ab­sent some GFC-like shock — and I sug­gest it re­ally would have to be big — the next one will come at its next meet­ing just be­fore Christ­mas.

There are more planned for next year, with the Fed in­tend­ing to head to at least 3 per cent.

Now, our RBA has con­sis­tently been more cir­cum­spect. It has never for­mally com­mit­ted to a rate rise — even a “fu­ture” rate rise — in any of its rate state­ments, or its more de­tailed pol­icy anal­y­sis; although gover­nor Philip Lowe has said sev­eral times he ex­pected the next change would be up. Im­por­tantly. When it came.

With that back­ground, the short an­swer to the two ques­tions is that nei­ther Fed head Jerome Pow­ell nor the RBA’s Lowe will blink.

The Fed won’t stop hik­ing just be­cause Wall St throws a tantrum. His two pre­de­ces­sors did. If they looked like mov­ing — and re­mem­ber that was mostly just off zero — Wall St would go down 600 or so points and they would rush to say their hands weren’t any­where near the rate lever.

It’s partly that be­lief that they can bully the Fed, mar­ried to a bull-mar­ket men­tal­ity that higher rates don’t even mat­ter, that the “Wall St mas­ters of the uni­verse” have kept driv­ing share prices higher; with this past week re­cov­er­ing al­most all of Oc­to­ber’s plunge, al­beit with a lit­tle bit of a drop overnight on Fri­day.

Jerome is only go­ing to “blink” if he got a real GFC­like event or if the boom­ing US econ­omy started to hit the wall. So what hap­pens with China is im­por­tant.

Back here, the RBA is not go­ing to hold off hik­ing just be­cause the two-city prop­erty mar­ket goes south. But that does not mean it’s primed to hike. No, it will all de­pend on what hap­pens in the broader econ­omy and that in­cludes prop­erty and con­struc­tion. And what comes flow­ing our way from across the Pa­cific and down from the north.

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