Low odds for hike

Townsville Bulletin - - NEWS -

Townsville THE Re­serve Bank is not go­ing to lift its of­fi­cial in­ter­est rate any­time soon – or in­deed, at a more ba­sic level, sig­nal or even just hint at a fu­ture rate change any­time soon.

This ap­plies to at least its next two monthly meet­ings, ab­sent some dra­matic ( and ex­tremely un­likely) shock.

So, it’s on to Mel­bourne Cup Day – the day of not only the race that stops a na­tion but also the an­nounce­ment out of Syd­ney which can of­ten throw a prop­erty spec­u­la­tor off his stride.

Don’t in­ter­pret this to say there will be some change or in­di­ca­tion of change on Cup Day. Sim­ply, that it’s the first meet­ing af­ter the next ( Septem­ber quar­ter) in­fla­tion fig­ures; and the RBA likes to “hang” es­pe­cially a rate rise off them.

In­ter­est­ingly though, we have not had a Cup Day rate change in any of the last five years. The last was in 2011 and that was a rate cut.

But we had Cup Day rate changes in ev­ery one of the five pre­ced­ing years be­fore that, back to 2006; and four of them were rate in­creases, in­clud­ing most fa­mously – or in­fa­mously – the elec­tion eve hike in 2007, which two for­mer politi­cians will re­mem­ber to their dy­ing days.

You can­not as­sume that the next of­fi­cial rate change will be an in­crease.

Yes, the RBA has made it blind­ing- ly clear that it be­lieves its next move will be an in­crease – although, to stress, it is ( sen­si­bly) in no hurry to ac­tu­ally de­liver it.

De­spite the – I’d call them som­bre rather than bear­ish – com­ments in yes­ter­day’s state­ment about the im­pact of a strong Aussie dol­lar, the RBA re­mains broadly up­beat about both the lo­cal econ­omy and the global out­look.

That ap­plies es­pe­cially to the US and Europe, but also, broadly, to China.

Yes, it noted yes­ter­day that the strong Aussie was “weigh­ing on the out­look for out­put and em­ploy­ment” and “an ap­pre­ci­at­ing ex­change rate would be ex­pected to re­sult in a slower pick- up in eco­nomic ac­tiv­ity and in­fla­tion than cur­rently fore­cast”.

But its lat­est fore­casts in this Fri­day’s de­tailed pol­icy state­ment will show it still be­lieves eco­nomic growth will con­tinue to strengthen, top­ping 3 per cent into next year and stay­ing there through ( at least) 2019.

It will con­tinue to pre­dict the job- less rate stay­ing below 6 per cent – but not drop­ping below 5 per cent, and its in­fla­tion mid­point fore­cast will re­main right on the 2 per cent bot­tom end of its 2- 3 per cent tar­get range.

Prop­erly in­ter­preted, all this tells us a mix of three things. The RBA ex­pects to even­tu­ally lift its rate. But it does not ex­pect to start any­time soon. And the rate rises – as­sum­ing there is more than one – will be stag­gered over an ex­tended pe­riod.

In sum and in short, it’s not go­ing to rush to start, and it’s even more cer­tainly not go­ing to blindly or even in­evitably rush to de­liver the “eight rises” sug­gested ( not pre­dicted) by for­mer board mem­ber John Ed­wards or im­plied by its own in­ter­nal as­sess­ment of a “new neu­tral” rate of 3.5 per cent.

Three other un­der­stood.

The first is the rate rises that have al­ready been de­liv­ered directly by the banks – equiv­a­lent to one of­fi­cial RBA rise to al­most all bor­row­ers and more like three RBA rate rises to points need to be prop­erty in­vestor bor­row­ers. Set­ting aside the ar­gu­ment over “bank goug­ing ( or bash­ing)”, th­ese have been not only the rate rises you have when you haven’t had an of­fi­cial rise, they’ve also been much more ef­fec­tive rises.

Why do I say that? Be­cause if they had been de­liv­ered by the RBA, the Aussie dol­lar could well be at US85¢ and head­ing for US90¢ and it would have meant a ma­jor change in of­fi­cial pol­icy that was not war­ranted and in­deed highly dam­ag­ing to the broader econ­omy.

But they have, de­sir­ably, taken some heat out of the prop­erty mar­ket.

The se­cond point is that de­spite those “anti- strong Aussie” com­ments yes­ter­day, the RBA is not go­ing to try to ag­gres­sively “jaw­bone” the Aussie lower.

It knows it wouldn’t work: to be even half- cred­i­ble it would have to be sup­ported by the im­plicit threat of of­fi­cial rate cuts, and that’s cer­tainly not cred­i­ble.

As I wrote a few weeks back, the of­fi­cial rate ain’t go­ing any­where and the Aussie, so far as the RBA is con­cerned, can go where it damn well likes. Some im­por­tant fi­nal points. Yes, the RBA is em­barked on ac­tively do­ing noth­ing with its rate, but the op­er­a­tive word is “ac­tively”. If the world changes, if the world changes sud­denly, it is pre­pared to act at ev­ery meet­ing.

This is also why, sec­ondly, you can’t as­sume that the next change will be a hike.

If the RBA doesn’t get to move un­til, say, late 2018, who knows what the world will be like by then.

Fi­nally, there’s a lot to be said for the RBA leav­ing its rate un­changed. At var­i­ous times com­men­ta­tors have de­manded it slash, while oth­ers have de­manded it should have al­ready hiked and hiked again.

Sit­ting still ( af­ter slowly com­ing down to 1.5 per cent) looks pretty good, even with 20- 20 hind­sight.


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