Bill Evans on the resistence of Backbone Phil

From Bill Evans:

The new Governor of the Reserve Bank Philip Lowe has used the minutes to the December Board meeting to clearly lay out his delicate policy challenge over the next year.

We have been used to monetary policy being largely driven by changes in the inflation outlook or prospects for economic growth. While these factors remain entirely relevant for the Bank, the minutes note that the Board members took time to assess the policy decisions made since the latest easing cycle began in late 2011. The key issue for discussion was around the impact of lower interest rates on asset prices and borrowing decisions. The definitive quote is: “Over recent years the Board had sought to balance the benefits of lower interest rates in supporting growth and achieving the inflation target with the potential risks to household balance sheets. Members recognised that this balance would need to be kept under review.”

I think this observation, which figures so prominently in the minutes, is signalling that the hurdle to even lower rates which would be aimed at boosting demand is very high. With housing markets in the south east remaining vibrant the risks of further cutting rates appear to be quite concerning for the Board. That view has certainly been a key aspect of our view that the cash rate was likely to remain on  hold for an extended period following the (inflation-motivated) rate cut in August.

Observations around the economy were broadly in line with the Governor’s statement on December 6. At the time of the meeting the Board was unaware that the Australian economy contracted by 0.5% in the September quarter. However it was aware that growth in the September quarter was likely to be weak and certainly weaker than had been expected at the time of the November Statement on Monetary Policy. However, as we saw in the Government’s Mid-Year Economic and Fiscal Outlook which printed yesterday the official forecasts (not necessarily exactly held by the RBA) imply average quarterly growth rates of 0.8% in the  December( 2016), March ( 2017) and June (2017) quarters. Hence the minutes still refer to “growth picking up to be above potential later in the forecast period”.

The views on the labour market are less confident than we saw in the last set of minutes – “There was still considerable uncertainty about the momentum in the labour market”. Having noted this quote it is however interesting that the detailed discussion on the labour market seeks to align the fall in the unemployment rate with a similar hours-based measure, providing more credibility to that fall.

The commentary on the housing market remains upbeat while recognising that there was considerable variation across the country and between houses and apartments.

There is also some positive commentary around the consumer. We now know that consumer spending in the September quarter was well below average but the minutes point out that since then retail sales have grown at an above average pace and liaison with retailers suggested that trading conditions had remained “steady”.

The minutes are also seeking to paint a better picture for non-mining investment than the downbeat capital expenditure survey that printed in late November – “Over the past few years the national accounts had tended to report stronger outcomes [than the capex survey]”.

The commentary around China remains unchanged with activity being supported by accommodative policy although longer term risks associated with rising debt remain elevated.

The minutes had no real insights into the outlook for the US or markets. Uncertainty around Mr Trump’s policy agenda remains the challenge.

Conclusion
With the negative GDP print for September not being known at the time of the meeting this was always going to be a difficult set of minutes to write. In the event the Board has chosen to highlight in the minutes aspects of the discussion that provide a reasonably upbeat assessment of the economy: growth is expected to bounce back; spare capacity in the labour market, while ongoing, appears to have been reduced; the housing market has strengthened; consumer spending and non- mining investment prospects have improved..

However of most significance is the policy commentary that, I believe, implies a fairly clear signal that monetary policy is now representing asymmetric forward risks with the benefits to spending from the lower rates not compensating for instability in asset markets. Of most concern here are the elevated levels of household debt.

It has been Westpac’s view for some time that rates are likely to remain on hold through 2017 and 2018 and the discussion in these minutes gives no reason to qualify that view.

I’ll give you one, Bill: the economy.

Comments

  1. Lowe evidently thinks that there is nothing that lower interest rates can achieve that can’t be achieved with rates where they are. He might well be right. If you are a business and tossing up whether to invest in plant and equipment, you can borrow today at very low cost. Is another 25 basis points off the interest rate (assuming an RBA cut is fully passed on ,which it won’t be) really going to make any worthwhile difference to your profitability or cash flow? You can’t fix business and consumer confidence by making already cheap money a little bit cheaper.

    • I think your correct @Zeet. Any further cuts are likely to be purely exchange rate driven IMO, I think the May and August cuts were somewhat attempts to enforce a ceiling on the AUD disguised in reasoning by lower inflation. With the Fed potentially moving into a more aggressive hiking cycle, the RBA has no need to cut further and risk any further upside risk to house prices. We will be at 1.50% for a while.

    • Are business interest rates really set off the RBA cash rate? I spose you are right for very small businesses which effectively borrow off their mortgage. Even that said, the banks aren’t even following the RBA when setting home loan rates anymore.

      I think more to the point what the new guvnor is saying is that ‘yes I’m aware household debt is very elevated and it will be more of a concern for me than it was my predecessor. I am laying out there for all to see that I may do something about it, but in reality this is more the bailywick of APRA, not the RBA’.

  2. I think your correct @Zeet. Any further cuts are likely to be purely exchange rate driven IMO, I think the May and August cuts were somewhat attempts to enforce a ceiling on the AUD disguised in reasoning by lower inflation. With the Fed potentially moving into a more aggressive hiking cycle, the RBA has no need to cut further and risk any further upside risk to house prices. We will be at 1.50% for a while.

  3. “Of most concern here are the elevated levels of household debt.”

    How times change! About this time of the year for many years I’d get a call from a friendly banker telling me that my credit card limit had just been upped to reward me for being a good customer. A few years back, that stopped. This year I got a call “Just checking, but you haven’t used your limit for some time. Would you like us to reduce that for you to make any other financial arrangements you might make easier?”. That ‘concern’ that Bill writes of, now has a tangible smell of fear……

    • “Of most concern here are the elevated levels of household debt.”

      And pray tell, who would be the bedfellows in orchestrating that? The RBA, APRA and Big Debt?

    • doubt very much the banks are sitting there quaking with fear yet. there may be some small internal policy decisions around affordability levels but they are as much likely to be driven by internal factors / regulation.

  4. “There is also some positive commentary around the consumer. We now know that consumer spending in the September quarter was well below average but the minutes point out that since then retail sales have grown at an above average pace and liaison with retailers suggested that trading conditions had remained “steady””
    Consumer spending to increase our foreign debt is a cause for celebration????? Strewth modern economics is a strange bloody animal – or more like one gone mad and dangerous that should be ‘put down’

  5. “I’ll give you one, Bill: the economy.”

    And a second is to tip more savers over the cliff?
    And a third is to goose up IP portfolios a bit more?
    And a fourth is to assist emerging lenders get money out the door?

  6. I would bet $ that Morrison got his brain snap to get rid of the A$100 note from the creatures at the Reserve Bank. They know that someday what’s been happening around the World will NOT end well -especially for the Banks – especially Australian Banks with 70% of Debt tied up in Housing. We’ve got to fight these monsters because the $100 note is just for starters.
    From — The War On Cash And Then On Gold And Silver
    http://www.gold-eagle.com/article/war-cash-and-then-gold-and-silver
    SNIP:
    “The global financial system continues to groan under the strain of the accumulated weight of trillions of dollars of debt and derivatives, which have built up to even more fantastic levels than those that precipitated the near collapse in 2008. And thanks to the policy of solving liquidity problems near-term by creating even more debt and derivatives, Quantitative Easing being the most obvious example. However, while the majority consider the situation to be hopeless, there is actually “light at the end of the tunnel.”
    If only a way could be found to freely tap the funds of savers at will, by imposing duties or taxes on bank accounts with the additional option to appropriate savers’ funds on occasion as required. Subsequently, the systemic liquidity problems will be solved. Banks need never fear solvency problems again. Consequently, they can simply fall back on the account holder’s funds to meet any obligations. There are in fact already names for these restorative operations, they are called “bails-ins” and NIRP (Negative Interest Rate Policy).
    Unfortunately, any immediate attempt to implement bail-ins and NIRP on a large scale will backfire because, faced with being charged significant sums for the privilege of keeping their money in the bank, savers will simply withdraw their funds and keep as cash at home. Alternatively, they may even invest in Precious Metals. It is therefore imperative that these escape routes are blocked off.”

    The rest of the article is very well worth the read .

  7. If lower interest rate can always spur economy growth…tell me what happens in Japan and European …