TERRY MCCRANN

THE rest of your financial and investment life began yesterday after the Reserve Bank left its official interest rate unchanged at 1.5 per cent.

The potential changes are many-faceted, potentially dramatic and volatile, and ultimately unpredictable both as to time and direction.

Now there was of course zero surprise in the RBA’s non-move.

It was always going to do exactly nothing, as it has done in every month – apart from January time off for good behaviour – since the rate was last moved way back in August 2016 by the previous Governor Glenn Stevens in his final monetary bequest to the nation. So why was the (non) event so portentous? It turned expectation into reality.

It is not just that the RBA rate ain’t going anywhere anytime soon. But it is staying at 1.5 per cent when the comparative US official rate is now significantly higher at 2-2.25 per cent (they go for a range) and is going to go even more significantly higher.

Absent some shock financial or geo-political cataclysm, the US rate will go to 2.25-2.5 per cent in December; and the US Fed’s “present intention” is to take it to at least 3 per cent by the end of 2019.

Now, there’s a simple broad message in that divergence: the US economy is running hotter than our Aussie one; and we can rather more confidently – but not certainly – expect that to continue into 2019.

But beyond that broad message, it is important to understand and to separate the complex mix of forces driving the US rate – and the ones that will likely flow from the rate increases; and the very different ones separately driving what the RBA is thinking and doing.

This last will include what flows out of the US and across the Pacific and thereby feeds into our local dynamics. For once we – and most especially the RBA – are starting from the best possible place at that 1.5 per cent.

In all the turmoil bubbling around – the political and policy chaos, counting down to an election; the property market under pressure, with the ripples flowing out from the Royal Commission likely to whack it even harder; wages sluggish; retail uncertainties, higher petrol prices; etc – be very thankful for that 1.5 per cent and the RBA.

Into 2019, the US can go in one of two broad directions. One is rates continue to go up, both reflecting a strong US economy and not bringing it to a grinding halt – a sort of super-soft landing.

The other is a version of the boiling frog scenario. Wall St is close to its alltime high; investors seem utterly unfussed by the prospect of the higher rates which, ever since Adam was a boy, tend to bring bull markets to a screeching halt.

This super-optimism could end very badly and suddenly – broadly, some sort of replay of 2008.

Ahead of that, the RBA will be quite happy to see the Aussie dollar slip below US70c, given those higher US interest rates and the way the strong growth we recorded in the June quarter was built on rather fragile consumer spending, with modest wages growth and high household debt.

If the first US scenario plays out that would leave an RBA ready and able to gently start raising our rates, but always with an eye to what’s happening to growth, jobs, wages, household debt and debt servicing burdens.

In the second scenario the RBA would be prepared to cut its rate. At 1.5 per cent it obviously would not have much room to move. But we would be picking up some benefit from an Aussie dollar which would fall even further.

The China wildcard would then become critical. In 2009 the China boom helped everyone but most especially us. There’s no prospect of it being as powerful again, but it could – and indeed probably would – put a floor under our economy. We really have entered into a new world. US rates have never been higher than our rates in all the years of our unbroken growth story back to 1991.

This will also be playing out in the totally unprecedented global economic and financial conditions that have prevailed since the GFC and the way the world’s major central banks took interest rates down to zero and left them there for a decade.

Then we’ve added the additional macrouncertainty of the Royal Commission’s impact on our banking system – plus the likelihood of a new leftof-centre government next year.

It’s going to be an “interesting” ride. The one great island of real-time calmness, continuity and sanity is the RBA. Be thankful, be very thankful.

COMMODITIES LOOK GOOD

THERE is also what looks increasingly like a very good “new normal” for a critically important part of our economy – our export commodity prices.

They have now been at their most stable since the period that ran all the way through the 1990s and the first half of the 2000s. But at prices which are running at roughly double what our exporters were getting back in those days.

In between, prices for coal and iron ore had really rocketed into the GFC and the China boom that followed. They peaked in 2012 at more than three times those earlier levels.

That was when BHP posted a profit almost equal to the entire combined profit of all four big banks.

Those levels were never going to last: between 2012 and 2015 they broadly halved. Some of the more hysterical commentators were predicting they would plunge all the way back to the levels of the 1990s – and indeed lower.

Well, as the RBA statistics show they have broadly levelled off around double what they were back then – and they have broadly maintained that level for three years now.

This provides a really important island of stability in the generally volatile domestic and global economic environments. Let’s hope it is sustained.