Rate’s stay­ing put

Townsville Bulletin - - NEWS -

Townsville THE Re­serve Bank’s of­fi­cial in­ter­est rate is not go­ing any­where any­time soon. The Aussie dol­lar can go where it damn well pleases.

Let me put those two thoughts very sim­ply to­gether. In the wake of the sup­pos­edly “bullish” RBA min­utes yes­ter­day, mar­ket traders bought the Aussie, send­ing it above US79c, on the in­creased ex­pec­ta­tion of a RBA rate rise.

But the very ac­tion of send­ing the dol­lar to­wards US80c ab­so­lutely ruled out any prospect of a rate rise! And if the Aussie goes above US80c, the RBA rate will be ce­mented even fur­ther into the con­crete in which it is al­ready set, so to speak.

But if then, dis­ap­pointed buy­ers turned to sell­ing the Aussie and it headed back to­wards or even be­low US75c? Same an­swer: the RBA rate will just re­main set in the con­crete.

Now yes, as it made quite clear yet again, in yes­ter­day’s min­utes, it would pre­fer the Aussie in the US70c- 75c range. But if it goes to US80c so be it.

And if it goes above US80c that would be “un­help­ful” and – to use the RBA’s ex­act word – “com­pli­cate” matters, but through grit­ted teeth, still so be it. The RBA would not try to “do any­thing about it”.

First thing to be said about the min­utes is that it was sur­pris­ing there was any­thing sur­pris­ing in them, so far as com­men­tary on the im­me­di­ate fu­ture and the RBA’s likely short­term pol­icy stance is con­cerned.

That in­ter­pre­ta­tion of them be­ing newly bullish was just silly. The RBA has been “hid­ing” its bullish­ness in plain sight for over a year.

Yes, for the first time, it set out its be­lief that the “neu­tral” of­fi­cial rate was 3.5 per cent. Do the maths: with its rate now at 1.5 per cent, that might sug­gest eight fu­ture rate rises that for­mer RBA director John Ed­wards spoke about a few weeks back.

But that does not mean it will start, or have to start any­time soon.

The RBA has con­sis­tently been pre­dict­ing the econ­omy would pick up pace to ap­proach a very solid 4 per cent an­nual growth rate some time next year, along with in­fla­tion ris­ing into its 2- 3 per cent tar­get range.

It’s also crit­i­cal to un­der­stand they still re­main largely ex­pected out­comes. At the more gran­u­lar level the RBA has a num­ber of un­cer­tain­ties and in­deed con­cerns.

The two key ones are the very low rate of wages growth and the level of debt in the house­hold sec­tor. They com­bine to put a big ques­tion mark over the abil­ity of con­sumers to go on a spend­ing binge.

A – ar­guably even the – crit­i­cal sen­tence in yes­ter­day’s min­utes was: “mem­bers noted that there were still risks to con­sump­tion growth should house­hold in­come growth re­main sub­dued, par­tic­u­larly given the high lev­els of house­hold debt.”

Quite apart from what’s hap­pen­ing to the Aussie, the RBA is not go­ing to raise in­ter­est rates into that un­cer­tainty. Or should I say, raise its of­fi­cial rate. It tends to be for­got­ten that ac­tual bank lend­ing rates on prop­erty have gone up by the equiv­a­lent of one of­fi­cial rate rise for all bor­row­ers and closer to three of­fi­cial rate rises for in­vestors.

The RBA is not un­happy with that from the per­spec­tive of over­heated prop­erty lend­ing; and it’s done a little bit of the move up re­lated to the broader econ­omy.

An im­por­tant “left field” driver of the Aussie’s strength is not well un­der­stood – the im­pact of the dra­matic fall in our cur­rent ac­count deficit, thanks mostly to strong vol­umes of com­mod­ity ex­ports and rea­son­ably strong prices.

Just a year ago the deficit was run­ning at an $ 80 bil­lion an­nual rate; in the lat­est March quar­ter it was down to just a $ 12 bil­lion an­nual rate.

This in it­self can have a big im­pact on the value of the Aussie if the banks keep bor­row­ing in global cap­i­tal mar­kets; they might “over- fund” the deficit. It also gives spec­u­la­tive flows more power over the Aussie.

The bot­tom line is that this works to put a floor un­der the Aussie, while leav­ing it open to sharp moves on the high side.

The RBA will be watch­ing this closely. But its “big watch” will be on what the US Fed does with its of­fi­cial rate – and what’s hap­pen­ing in the US econ­omy and global fi­nan­cial mar­kets that will drive Fed ac­tion. And China.

The RBA’s base case hasn’t changed. It sees a grad­u­ally strength­en­ing Aussie econ­omy back­dropped by a broad global pick- up. On that ba­sis it will be look­ing at rais­ing its rate from – loosely – Cup Day.

But it won’t as­sume this Goldilocks fu­ture will be de­liv­ered as if on au­to­matic pi­lot. It will watch what ac­tu­ally hap­pens and will watch from month to month.

Indices

NO IN­TER­EST RISE: Re­serve Bank of Aus­tralia Gover­nor Philip Lowe.

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