Rate’s staying put
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.