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Government leaves RBA to push on its piece of string
The RBA cut the official cash rate to a new record low at its August meeting, but here is what Reserve Bank governor Glenn Stevens did not say.
“Well, the federal government is showing stuff-all economic leadership. Turnbull and Morrison have no plan to stimulate the economy to absorb excess capacity to lift inflation off the floor. Business and consumers understandably have little if any confidence in the pair.
“So it looks like we have to do the only thing we can - make a token effort of trimming interest rates another 25 points to 1.5 per cent. It will make extremely little difference at this stage of the game but, hey, someone has to be seen to be doing something. The markets expect it of us.
Also read: RBA slashes interest rates to new record low
“Fortunately, it looks like most of the heat is going out of the Sydney and Melbourne housing markets, or at least we bloody-well hope so. Otherwise all this cut will really do is enable people to afford yet-bigger mortgages and thereby bid more at auctions, pushing up housing prices that are already higher than we’d like.
“Just this once, I’d like to remind people of something Joe Hockey said back in 2013 when we cut the cash rate to 2.5 per cent: ‘They're not cutting interest rates because the economy is doing well. Interest rates are being cut to 50 year lows because the economy is struggling.’
“That was 100 points ago.”
“People aren’t stupid. This final rate movement of my RBA career won’t instil any greater confidence in the economy. No business will suddenly go out and hire a new worker because the cash rate is 1.5 per cent instead of 1.75 per cent. Consumers seem to be immune to yet-easier monetary policy at this level. The impact on the exchange rate won’t last long. We’re punching the country’s savers in the face, especially the scared retirees depending on term deposits for coffee money.
Also read: Get ready for the Aussie dollar to fall
“But, that’s the hand we’ve been dealt, left to push on a piece of string.”
I had better repeat that Stevens did NOT say that. But I wouldn’t be surprised if he privately thought it.
What Stevens, the respectful governor, actually said in his brief statement was what most economists predicted and the money market assumed: inflation is too low, it looks like we can cut rates again without pushing up housing prices, so we’ll trim rates another 25 points.
The game the RBA-watching industry plays with the governor’s post-meeting statement is to compare it line-by-line with the previous month’s statement to divine what’s changed in the RBA’s thinking to make them move rates. Most of the changes in today’s statement were tiny, basically confirming the suspicions voiced last month that Chinese economic growth was moderating, inflation was indeed low and that supervisory efforts were successful in reining in banks’ more enthusiastic housing lending.
Also read: Why is Australia's inflation rate so stunningly low?
If you want to play this game, the paragraph that seems to have mattered most, that changed the most, was the one about housing. A month ago, the governor wrote:
“Indications are that the effects of supervisory measures have strengthened lending standards in the housing market. Separately, a number of lenders are also taking a more cautious attitude to lending in certain segments. Dwelling prices have risen again in many parts of the country over recent months. But considerable supply of apartments is scheduled to come on stream over the next couple of years, particularly in the eastern capital cities.”
Today that became:
“Supervisory measures have strengthened lending standards in the housing market. Separately, a number of lenders are also taking a more cautious attitude to lending in certain segments. The most recent information suggests that dwelling prices have been rising only moderately over the course of this year, with considerable supply of apartments scheduled to come on stream over the next couple of years, particularly in the eastern capital cities. Growth in lending for housing purposes has slowed a little this year. All this suggests that the likelihood of lower interest rates exacerbating risks in the housing market has diminished.”
So that “likelihood” of lower rates not fuelling higher housing prices, betting on excess new apartments keeping a lid on prices, is what allowed the RBA to do the only thing it can do when inflation looks like being stuck below its target range.
Also read: Why economic uncertainty will put an end to first home buyer grants
The RBA hopes lower rates will help the economy and inflation. Hand me that piece of string.
The reality is that we are now a low-inflation nation in a low-inflation world. Central bankers around this low-inflation world keep advising that monetary policy is at its very limits, that the solution to the problem is in governments’ hands – but governments aren’t taking that advice.
We’re just very lucky that our non-resources businesses are actually picking up, that growth is relatively good as the lower currency and earlier rate cuts work their way through the system. This one doesn’t matter.
Michael Pascoe is one of Australia's most respected finance and economics commentators with over four decades in newspaper, radio, television and online journalism. He regularly appears on Channel 7's Sunrise and news programs and is a regular conference speaker, MC and facilitator.
