Low odds for hike
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.