ANZ backflips on rate rise

Yesterday’s unaninmity among the banks that there will be no rate rise in August has lasted a full 24 hours with ANZ rolling over and going all in:


ANZ now expects the RBA to lift the cash rate by 25bps to 5.0% in August. We are of the view that yesterday’s Q2 CPI result has brought inflation in Australia to an uncomfortably high starting point given the robust 2012 outlook.  This necessitates a small adjustment to the policy rate.

Memories of 2007/08 will make the RBA sensitive to being behind the curve on inflation.  A small upward adjustment to interest rates now could well save the Australian economy from a painful series of rate hikes in 2012.

Some members of the RBA Board may well not want to hike in August.  But with the RBA’s persistent focus on inflation, and the forward-looking nature of monetary policy, a small move now will likely be the RBA’s preferred action.  The RBA should have capital to convince Board members of the need to move given rates have been raised only once in the last fifteen months.   

If the RBA does not lift rates in August, it will be a finely balanced decision, likely driven by international uncertainties and recent weakness in domestic data. The most likely factor that could keep the RBA on hold in August would be a significant deterioration in the US debt situation (with the Board to meet on 2 August, the same day the US debt ceiling is expected to be reached). Even so, the RBA will likely use the Statement in August to prepare the markets for a September rate rise.

If rates are lifted in August, we expect it will be followed (again) by an extended period of no policy change. An August tightening would be a pre-emptive move to get ahead of the pick-up in growth the RBA expects over the next two years.  The non-mining domestic economy will remain soft over the rest of 2011, before mining investment drives a renewed upturn in aggregate growth over 2012. This is the new normal for the Australian economy.

Hence, whilst 5.0% is unlikely to be the peak in rates, a further tightening would be unlikely before the middle of 2012.

I think the RBA should wait, but the ANZ’s conclusion that if they do go that’ll be it for the forseeable future looks solid to me. We’ll be picking up the pieces for many months.

Houses and Holes

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the fouding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.

Latest posts by Houses and Holes (see all)


  1. I’m at a loss to understand how raising interest rates can lead to a decline in the prices of staples like fruit and electricity and so on where the demand is inelastic?

    • You’re right Sherlock, no rate rise is going to change the price of bananas. That’s the dilemma… you have to be “seen” to be doing something.

      • Well, I can’t see how rate rises are going to have much effect on the areas where most of the inflation is – not without crunching the rest of the economy.

        Surely the rise in mainly non-discretionary essentials which are not very sensitive (if at all) to interest rate rises is already functioning in a similar manner to rising interest rates by reducing purchasing power available for discretionary consumption
        spending……something which is already weak.

        I guess if they do hike, it won’t bring down the price of bananas or necessarily petrol either but it would probably undermine the recent stabalization that appears to have developed in the housing market and given the sluggishness of much of the economy outside the mining sector, may well introduce a recessionary bias.

      • What’s the deal with bananas anyway?
        Is the banana a leading economic indicator? The treasurer seems to think so.

        If bananas are expensive – I don’t buy them. Our quality of life doesn’t seem to suffer for it.

        If the price of something goes up so much that people stop buying it – how can that be inflation?

    • If money becomes more expensive, somehow people (in large numbers) will try to squeeze their expenses a bit, lowering demand – they simply can’t afford more. Many Australians are not really used to cost cutting on bare essentials, but some will have to.

      There are a number of things that can be done to ease inflation:
      – reduce money supply
      – increase supply of goods (for example allowing the importation of Fiji bananas like they do in NZ: aways about AUD 3 per kg)
      – removing inefficiencies and high cost of doing business (Gov + work regulations)

      In relative terms AU suffers from inefficiencies; but that is precisely where the current Labour Gov is not helping; virtually every action they take is inflationary in effect because it increases the cost of doing business and it increases the deposit Money Supply.

      • ” the current Labour Gov is not helping; virtually every action they take is inflationary in effect because it increases the cost of doing business”
        Like what? Can we have some examples?

        • Are you seriously doubting this Government has been horrbile for business?

          We have had 0 private telecommunciation investment over the past 4 years due to the NBN fiasco…and now they are rolling it out to areas chosen by Windsor and Oakeshott

          They have brought in IR laws that make it impossible for small business to efficiently run their business and sack staff when neccesary

          They have brought in 1000s of taxes adn regulations, most of which have totally failed (Fuelwatch, Grocery Watch).

          They have engaged in wasteful stimulus to satisfy people like Lefty who dont understand that stimulus only delays a recession it doesnt ‘stave it off’…as we are witnessing now.

          Basically – they have no idea how business operate because I bet you not one of them has EVER run a business. They are all union hacks, academic wanks or former public servants.

      • Carbon bologny

        I disagree on that last point. Labour has been fantastic for this economy what with:
        1. ripping out infrastructure that works fine and replacing it with infrastructure that works a bit better
        2. censoring the internet by stealth
        3. taxing the air we breathe
        etc etc

        Seriously though, the only good thing that’s happened on their watch is the overhaul of consumer laws – which I think should be strengthened further to make RE agents and the media more accountable for influencing people’s investment/financing decisions with their bullsh*t.

      • Well here we are nearly three years down the track from stimulus spending to stave off severe recession and the runaway inflation, nay – HYPERinflation that the inflationistas screeched about back then has failed to eventuate.

        But a small uptick – despite the fact it represents a slowing from the pace of last quarter, despite the fact that it is clearly unrelated to consumers binge-spending wildly with all this extra money apparently sloshing around out there – has them frothing at the mouth again.

        Hope springs eternal I guess.

        Looking at it, the amount of money held as bank deposits deosn’t seem to have that much bearing on how much consumption spending is going on.

        • Lefty…do you not think that inflation is an issue? If you are really a “Lefty” you would also be scared of inflation as it is a tax on the poor.

          You may believe the CPI figures and the mangled and deceitful way they are manipulated, but I dont.

          The cost of living is out of control and that is squarely the fault of this Government that continues to tax, spend and inflate the price of doing business with mindless regulations.

          • Much of the inflation is in bananas and petrol. The poor are not buying natural disaster-inflated bananas because they’re too dear at present. Luckily, in this country there is a minimum wage and welfare provisions to make sure they don’t get undernourished. Petrol hikes are not good news for anyone, let alone low income earners but hiking interest rates will have little or no effect here.

            You do understand that monetary policy can be used to curb runaway discretionary consumption spending, but has little effect on inflation in things that people need to buy regardless of what they cost?

            Oh, and pointlessly innefective interest rate hikes are a tax on the poor as well if it drives up the price of rent.

  2. I think it will all depends on timing.

    If there was yet another resolution to the European debt crisis immediately prior to the board meeting then they may well hike. If PIIGS (you really need both I’s these days) yields are spiking prior to the meeting, they will probably hold.

    Ditto for US debt ceiling “resolutions”.

  3. The RBA might also be eyeing the inflationary impact the Carbon Tax will have. Added pressure to increase now.

    • ummm.. Carbon Tax will come into effect from July 1, 2012. i.e. Inflationary impact of the carbon tax is atleast a year away.

      • Mav, you think the RBA seek to manage the economy as it is right now or the expectations of tomorrows economy.

        • RBA looks at inflation over a business cycle. Going by their past actions, I don’t think it extends beyond a quarter (3 months).

  4. So assuming rates go up, the senario over the next 4 weeks.
    a) RBA annoucnes rate rise.
    b) Media hell brakes loose, and the politicians begin to feel heat, from industry and voters.
    c) A few days later the banks put up rates more than the RBA and blame the “increasing costs” gremlin.
    d) The public start to foam at the mouth and the politicians have no choice but to discuss intervention.
    f) The banks announce another great profit result!
    e) The govt’s surplus becomes another Juliar episode, Abbott is vidicated but remains devoid of any alternative policy.

    I hope they raise rates, maybe the public will finally be exposed to the reality of a nation of overgeared households managed by incompetent politicians. Get the popcorn ready…..

      • The_Mainlander

        No worries, I am the worst offender we just need to be able to ‘fix’ our comments.

        We have been asking for ages…



    • c. and f. may not happen – Beyond a point, mega mortgage mugs will simply default and impaired/bad loans will start rising.
      To keep the profit momentum going, banks will need to churn and burn new mortgage mugs at bullet speed.

      • Banks are due to make profit announcements in August. So I am happy with f, and c, well for me its a no brainer.

        Right now is the time to short the banks.

  5. Rising interest rates will be more of a PR exercise by the RBA than anything else. Don’t forget that they have been trumpeting interest rate rises for months and sitting on their hands while the CPI is above their upper bound is not giving them a lot of inflation fighting credibility.

    They will kill inflation expectations while prices of many goods and services will fall anyway due to lower demand. Banks will be cashed up due to more money finding its way into high yield deposits, some of it from the stock market and some from sold properties.

    This will hit hard the RE market but it has to happen sooner or later. It is time to flush all malinvestment and start building our economy on more solid foundations than mountains of debt sunken into houses.

    We can either have a sharp and relatively short recession or keep muddling through for a decade without a significant reduction in our debt level.

    • “We can either have a sharp and relatively short recession or keep muddling through for a decade without a significant reduction in our debt level.”

      Japan hasn’t had any luck with ZIRP and it certainly appears that neither has the US. I have heard opinion that had Japan not gone the ZIRP route then they’d have had a short recession then moved on. But they are following ZIRP and you have people and corporations paying off excessive debt. Those repayments aren’t going towards anything productive. Cue stories where people are paying off houses that they bought in the 80’s and they STILL are in negative equity and have NO hope of repaying the loan in their lifetime. Far better IMHO for all involved to call a spade a spade and wear the default.

      IMHO it is FAR better to raise rates and cull off the excessive debt in the economy so we can put the money that would have gone to servicing non-productive debt towards something useful.

  6. Alex Heyworth

    The problem with doing a backflip is that you end up facing the same direction.

  7. I think the tightening bias of the RBA will give away to the stupidity of the Australian public, who think cheap access to credit should take precedence over the need to fight inflation.

    People dont notice inflation and so they dont care about fighting it.

    Tightening rates will bring down the price of everything that doesnt have some temporary shortage of supply as demand will reduce.

    It will hurt…but its meant to hurt.

    People will bus it instead of drive, they will subsitute certain fruits for other fruits. They will make do.

    Rates are low by historical standards…its debt levels that are causing the pain.

  8. The decline of the Great Deflator – China – has been fast. Just as we were getting used to buying loads of stuff at rock bottom prices the workers in the workers paradise have started raising their prices.

    Clearly they have no concept of the discomfort they are causing down under where the low inflation era of the 1995 – 2010 period was seen as the perfect time to hold interest interest rates down and crank up household debt.

    We can only hope the global outsources secure new supplies of low cost labour before those selfish Chinese workers force us to confront more sustainable prices of finished goods.

    If low interest rates are producing hysteria, get ready for the ear plugs required if the mighty dollar sags while prices out of china rise.

    I want my cheap TV…. To the tune of an old Knophler track

  9. Tonight I had a chat with a friend whose family owns a fruit farm in Griffith. He mentioned the farm has not received a single cent extra from the rapid rise in fruit prices. It is a coordinated wholesale and retail ripoff.

  10. Just wondering about the assertion bananas and electricity are inelastic. Surely people can switch from bananas to apples or oranges, and surely people can decrease their electricity consumption, including through energy efficiency measures.

    I haven’t eaten a banana in ages.

  11. “(Reuters) – Italy’s borrowing costs soared at a closely-watched bond auction on Thursday as investors worried by the euro zone debt crisis and an impasse over the U.S. debt ceiling exacted a high risk premium.

    The 8 billion euro auction came in volatile markets made more feverish by rumors, denied by a cabinet colleague, that Economy Minister Giulio Tremonti was preparing to resign, and unconfirmed talk of European Central Bank bond-buying.

    Pressure on Italian stocks and bonds reflects both concerns about Rome’s ability to bring down its debt pile — second only to Greece’s in Europe at 120 percent of annual output — and wider doubts about whether last week’s euro zone summit found a durable solution to the Greek debt crisis.”

    Anyone who thinks this is a good moment to raise rates is delusional.

  12. Sandgroper Sceptic

    The problem david is that many groups never want interest rates to rise, for them it is never the right time. Europe is going down anyway, we should surely focus on our economy.

    ZIRP and Keynesian economics are totally failures. If people cannot afford to keep their house with a few 25bp interest rate rises then they should never have bought in the first place. Lending at 95% LVRs should never have been allowed to happen, regulators hello?

    Inflation is an insidious tax and once the genie gets out it is nigh impossible to put back in. Why does no one ever mention savers? From memory between 30-40% of total households have no mortgage debt on their principal place of residence. Perhaps they would like some interest rate rises? And renters who have savings?

    • Absolutely!

      There is a strange view held by many that low interest rates are like the magic pudding – the more that you eat the more that you get.

      Because the RBA fiddles with the cost of money people lose sight that it is a market like any other.

      Hold down interest rates or the price of bananas and you distort the market.

      The cost of low interest rates and policies tilted towards captial gains is that few people saved a cracker during 1995 – 2005.

      Instead we used the savings of foreigners.

      Low Interest rates are not some freebie that the RBA denies us just to be a grinch.

      At 4.74% people are saving again – but a lot is due to fear.

      I doubt that 4.75% is enough to encourage a reasonable continuing pattern of saving into the medium term.

      Inflation should be a secondary purpose of interest rate policy. The first purpose is to maintain a healthy balance between saving and consumption.

      The only super account any one should need is a savings account.

    • Raising interest rates is only going to put pressure on people with debt. HnH and the rest of the fine bloggers here at MB have already shown that rental yields are not going anywhere at the moment, and I don’t see that changing much the next year or two tbh.

      Maybe it’s schadenfraude, but as an early twenties professional with no debt and lots of disposable income it looks like all those people who recklessly took on too much housing debt (and forced up housing prices as a result) are getting what’s coming to them…

      • Right there with you Jason…the problem is, in a democracy the majority run the show…and we (debt free) are in the miniority.

        That is why inflation will be the option chosen by the Government…as it is the poiltically expedient way to deal with a debt bubble…all the while picking our pockets while we sleep!

  13. I find it VERY hard to believe the RBA board will raise the cash rate next week with the US Debt ceiling debacle overshadowing it. Having said that though, it’s apparent to me that the RBA *wants* to raise rates (and has done since March), and my guess is someone at ANZ’s mate’s chauffeur has the inside word that the rate rise is pencilled in.
    As a housing bear I will laugh and laugh if they raise rates.

  14. The RBA has previously raised rates to let the Gov’t know their spending is getting out of line and they need to exercise some responsibility.

    I’d like to see deposit rates up to about 8% for a one year fixed term at a bank to make up for some of the loss due to tax and inflation.

    It’s 6% at the moment so there is some way to go in order to encourage more saving and less debt.