No hike

Statement by Glenn Stevens, Governor: Monetary Policy Decision

At its meeting today, the Board decided to leave the cash rate unchanged at 4.75 per cent.

The global economy is continuing its expansion, but the pace of growth slowed in the June quarter. The supply-chain disruptions from the Japanese earthquake and the dampening effects of high commodity prices on income and spending in major countries both contributed to the slowing. It is still not clear how persistent this slower growth will be. The supply-chain disruptions are now gradually abating and commodity prices have softened of late, though they generally remain high. In China most indications suggest only a mild slowdown so far.

The central scenario for the world economy over the next couple of years envisaged by most forecasters remains one of growth below the pace of 2010, but at or above long-term averages. Downside risks have increased, however, as concerns have grown over the outlook for the public finances of both Europe and the United States.

Australia’s terms of trade are now at very high levels and national income has been growing strongly. Investment in the resources sector is picking up very strongly and some related service sectors are enjoying better than average conditions. But in other sectors, cautious behaviour by households and the high level of the exchange rate are having a noticeable dampening effect. The impetus from earlier Australian Government spending programs is now also abating, as had been intended.

The resumption of coal production continues, but a full recovery of flood-affected production now looks unlikely before early next year. Precautionary behaviour by households also looks likely to keep some areas of demand weaker in the near term than earlier expected. Overall, growth in real GDP through 2011 is now likely to be at about trend. Over the medium term, overall growth is still likely to be at trend or higher, unless the world economy deteriorates noticeably.

Growth in employment has moderated and the unemployment rate has been little changed, near 5 per cent, for some time now. Reports of skills shortages remain confined, at this point, to the resources and related sectors. After the significant decline in 2009, growth in wages has returned to rates seen prior to the downturn, though productivity growth remains weak.

Year-ended CPI inflation has been high, affected by the extreme weather events earlier in the year. As these effects reverse over the next couple of quarters, CPI inflation should decline. But measures that give a better indication of the trend in inflation have begun to rise over the past six months, after declining for the previous two years. While they have, to date, remained consistent with the 2–3 per cent target on a year-ended basis, the Board remains concerned about the medium-term outlook for inflation.

It is appropriate under such circumstances for monetary policy to exert a degree of restraint. Most financial indicators suggest that it has been doing so, as a result of the Board’s decisions last year. Credit growth has declined over recent months and is very subdued by historical standards, even with evidence of greater willingness to lend. Most asset prices, including housing prices, have also softened over recent months. The exchange rate is high. Each of these variables is affected by other factors as well, but together they point to financial conditions being tighter than normal.

At today’s meeting, the Board considered whether the recent information warranted further policy tightening. On balance, the Board judged that it was prudent to maintain the current setting of monetary policy, particularly in view of the acute sense of uncertainty in global financial markets over recent weeks. In future meetings, the Board will continue to assess carefully the evolving outlook for growth and inflation.

Houses and Holes
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  1. >The supply-chain disruptions from the Japanese earthquake and the dampening effects of high commodity prices on income and spending in major countries both contributed to the slowing.

    No mention of the antics in Europe and Washington, and the ongoing de-leveraging trend that has been eveident overseas since 2008. Wow.

    • well there’s this:

      Downside risks have increased, however, as concerns have grown over the outlook for the public finances of both Europe and the United States.

      which is confusing two different issues but nevertheless makes mention of the two centres of world economic trauma.

      • McCrann used to have an excellent record with rate predictions. If you wanted to know what the RBA was going to do, you read his column. But his record has gone up in smoke this year.

        • Maybe McCrann hasn’t got every vested interest in the land screaming in his ears to hold fire on rates or house prices will fall and the economy will go down the tubes in spectacular fashion. Stevo certainly does. In fact, I reckon the Guv is probably wearing the brown undies right now. We now have as good a signal as we’ll ever get that high house prices are the most significant factor in the Australian economy.

          Stevens has tried jawboning about higher rates, but his bluff has been called now. Now even that will seem hollow. He’s now rightly seen as weak at the knees and unwilling to do anything that would seriously reduce house prices.

          • “Do you really think that there isn’t now a near hysterical fear of imminent rate rises in the community?”

            Nope. Talking to Joe and Jane Public I’ve noticed a definite change in rate sentiment in the past month. My folks and all their fellow property investor baby boomer friends are expecting rates to hold for now before going down. Ditto for the guy at work who just got a sizeable mortgage. In fact the only thing that convinced him to take on a mortgage at all was an expectation that rates will hold or go down in the foreseeable future. I’ve a few more examples but won’t bore you with details.

            In my experience the public were scared of the interest rate stick a few months ago, definitely not now. Steven’s bluff has been called.

          • Yeah, it’s hysterical in the media, that’s for sure. But let’s not forget that this is 4.75% we’re talking about here – historically low levels. A teeny weeny 0.25 increase is enough to call for the government’s head.

            If we can get hysterical about that, we really are in waaaay too much debt.

          • Well, Glenn Stevens hasn’t learnt the lessons from his 2010 appearance on breakfast TV – the typical mega mortgage mug/property infestor only respond to the stick (interest rates). Warning against speculation is going to fall on deaf years and the “boom is back” spruikers take advantage of that.

  2. This has nothing to do with Europe. This has nothing to do with the USA.

    This has everything to do with too much private debt right here in Australia. Rudd-Prime will default like sub-prime faster with interest rate hikes. It will default more slowly with the rising cost of living that will result from not hiking. Choose your poison, Australia, but please don’t kid yourselves that the blame for the position Australia is in comes from anywhere outside of your own shores.

    • +1 – spot on, the talk of overseas risks is rubbish. Its all about collapsing growth in credit and the deleveraging that is just around the corner.

      Housing now dictates the RBA’s interest rate policy. The decision is horrible!

      • Couldn’t agree more, Stavros.

        Not even ‘houses and holes’ is an adequate description of the Australian economy. Could Australia be the world’s first economy to be solely reliant on expensive real estate?

        We talk about Dutch disease, but I think in decades to come the term ‘Aussie disease’ will have to be used to refer to countries that have blown an asset bubble so large that it completely took over the economy.

        • We are an exceptional example arent we Ralph, so much potential to be an economic heavy hitter…but it will all squandered as we have spent 15 years bidding up the price of established homes, lowering the rate of home ownership (and homelessness)… and all the time debt levels rising astronomically.

          And now, stuck between inflation of consumer goods and deflation of assets, the RBA have no idea what to do next

  3. The RBA shows that it is not independent when deciding the fate of this country’s inflation rate. The CPI obviously shows higher inflation than normal band yet RBA choose not to increase interest rate.

    Prudent savers are screwed again for the sake of the majority ignorant, greedy folks who have too much mortgage debts.
    This financial repression will not be gone un-noticed by prudent people.

    • I’d rather have cash hopefully holding its value than put it into likely depreciating assets or worse put it in TVs and cars. And better to be a saver in Australia getting 6% on a term deposit than the US where it’s less than 1%.

      • Well if you compared with US and its negative interest rate on savings…yes, we may be a bit better-off.

        But, as capital owner / saver the current small real return is surely not sufficient. Why would we want to sacrifice our current pleasure and consumption if the reward for prudent savings is close to nil or even negative.

          • Well, if our and global economy is going to blow-up anyway in the future as some doom predictions said… our savings prob would prob not having much effect / difference anyway.

            If all of us are going to deep problem in the future, I may as well live my life to the full capacity now and do whatever my heart wants. As someone wise said in the past, “in the long-term, everyone dies.”

        • If I was largely saving for a house, I’d prefer to be in the US with a negative real savings rate and depreciating houses. Sure my savings might be going backwards, but houses are going backwards much more quickly.

          Although having said that, if I was in the US I’d be tempted to buy and lock in a mortgage rate of 3.7% for 15 years or 4.6% for 30 years.

          • Deo and AB…spot on, I think people are greatly underestimating what effect the RBA decision has on savers who have not leveraged themselves up as much as possible.

            This is why central bankers are such scum…they create a debt bubble by not understanding the role of private credit in an economy and then have the hide to let inflation fix the problem for them.

      • If you hold cash while assets depreciate, you’re better off. And don’t kid yourself that the term deposit differential is enough to offset the vast difference in the price and quality of goods that you can get in the USA vs. Australia – and I mean housing, food, etc., not TVs.

        I moved here from NYC 2.5 years ago and my standard of living was better there than in this frog-boiling BS. CPI says 2-3% Per annum? It’s a lot more than that. We’re thinking about moving back.

    • Totally agree. The RBA has shown its true colours here.

      They may as well remove the reference to inflation from their goal and replace it with the stability of asset prices. Inflation demanded an interest rate increase, and the statement from them offers little more than hope that inflation magically falls by itself

    • Something like RBA being independent is illusory. Do anyone really believe we are free? OK the chain is not too tied but there is definitively a chain out there. The same for an entity like RBA. It does not operate in vacuum and the devices within, making the decisions are still partially human and related to humanity. Hence the outcome of their decisions is influenced by the political agenda at that time.

  4. So the RBA is captive to the heavily indebted and the banks that lent them all that money…

    Shame for us savers that are having our pockets picked by inflation

    • The problem with savings being eaten away is more of a tax issue than an inflation one. If we had lower inflation, interest rates would also be lower.

      • If we had lower inflation, interest rates would also be lower

        But not necessarily we would have higher interest rate when inflation is higher. That’s why it is more like silent thief, robbing your savings slowly but surely. Of course, the high income tax would not help.

    • As a prudent saver, I would surely try to fight back this financial repression by government agent.

      I already start reducing my saving deposits and buy more precious metals, blue-chip shares when prices dip and plan more overseas trips and shoppings. I would make sure my saving dollars go a long way which is preferably than supporting the banks with cheap funding.

      • it has always been an “unbalanced” resonpse of rate change — majority cheer on rate cut and majority irriate on rate hike.

        “independent” has never been truly independent.

        it s just another evidence of “asymatric” risk profile of housing.

        no only inflation give execute to push up rent, but also help to inflat mortgage away.

        isn’t it a great deal?! household has made one of the most rational choice — load up with DEBT.

  5. The Gov has spoken. Given a choice between inflation and crunching some house prices, he chose inflation. This confirms that the RBA is well aware of the super-bubble and wants to bring it down very gently. Inflate those debts away!

    On current trends, the core inflation ‘print’ (Joye, 2011) would need to be 1.5% or higher for the RBA to even consider hiking. We could be seeing annual core inflation of over 4.0% soon and still no hike. At least we know what the rules of the game are now.

  6. I am surprised that anyone wanted a rate rike today.
    The dis or de-leveraging has already begun.
    Clubbing the indebted over the head with a huge stick would change things from uncomfortable to downright nasty, for them and soon for all of us.
    BTW the AUD/USD has tanked since the announcement, was around 1.0980 beforehand, now 1.0917.

    • Couldnt agree more.

      Also, re inflation, it depends on where and how the inflation is originating. In the current situation, you have an economy full of weakness with really only one strong sector. Current inflation isnt due to broad economic strength, so the call to lift rates based purely on inflation is not the correct one.

      Inflation targeting simply doesnt work with global weakness and a dutch-diseased economy. In 2008 the RBA didnt recognise this and kept raising rates for too long, it seems that they have learned their lesson somewhat this time.

      Any rate rise in this climate will have a massive impact on the economy, housing in particular. You wouldnt want to raise rates, detonate the economy then go back to emergency rate cutting and stimulus when confidence has been completely eroded.

      • Agreed. MP is a blunt tool at the best of times. In today’s climate it would be like dropping a nuke on Afghanistan to eradicate terrorists, about as surgical as a machete.

    • Sandgroper Sceptic

      Pathetic decision. It shows we have an Independent Reserve Bank only in name. They should have hiked more aggressively earlier as inflation is out of control here. Overleveraged debtors are going to get smashed anyway, mainly due to their own irresponsibility, negative equity beckons for many of them.

      I am simply going to reduce my savings as per Deo’s comment (no I am not buying property either!), no point in watching them being eroded by low interest rates, taxes and high inflation.

      • Mate, even if the RBA put rates up to 5.75% , it would NOT stop the inflation we have in Australia. Until Govts at all levels pull their heads in and reduce spending, we the people are just along for the ride.

        • There are a million examples , but one very close to my home is our beloved council just resurfaced about 360 meters of our street for the sum of $300,000. They are going to finish the other 390 meters off this Fin year for the sum of $460,000. So they have spent $760,000 resurfacing a street, that frankly was just the same as the other 5 streets in our suburb and didnt need doing. And i’m talking about a side street, not a through fare or anything. Just a local street. Waste of money. Absolutely.

          • They have to use up their full budget this year or they won’t be able to argue for the same (or larger) budget next year, so won’t be able to get their {kid, brother, cousin, mate, etc} a job.

          • nick is right…..can’t jusrify asking for more money if you didn’t spend the amount you had before.

    • Clubbing the indebted over the head with a huge stick would change things from uncomfortable to downright nasty, for them and soon for all of us.

      Well, I think it’s relative. Just like keeping interest rate low, it may eventually lead to very high inflation which will not be good for everybody including people with high debts, but at least they would relatively better-off than savers …at least their debts will be reduced in real-term at the expense of savers. In terms of timing of problem the mortgage holders also will get their benefits first by having lower interest rate and maybe later problem if it leads to hyper-inflation.

      So, why can’t we as savers expect the opposite. If interest rate can be higher at least the inflation will not be so much problem for us, at least in short term and current time while let me worry about recession much later. Even if the recession comes, I would be in better position because I have savings.

      So, it is just a matter of two opposite camps. No surprise here.

  7. Come on guys, the RBA have shown time and again, they’ll look for reasons NOT to hike, and they got that when the pretty awful credit growth and new house builds data came in over the past couple of days.

    As much as I’d like to see rates go up since I’m a saver like many others here, I’m not at all surprised by the RBA’s inaction and I’m surprised that anyone was expecting anything else.

    • +1 , and if they did hike, the effect on housing would most likely push it closer to the edge. It’s going to happen anyway, but this just delayed it IMO. I expect the RBA deep down are worried, and just trying to nurse the non mining part of the economy.

    • Well Macster, truth is I was not surprised that RBA keeps the rate. But, it does not mean that I am not upset as savers.

      This is a big lie and I agree with others that said RBA should be honest telling us that they’re not really care about inflation in this country.

      • I agree Deo, I don’t like the idea of being pushed aside (as a responsible saver) in favour of others (irresponsible debtors), which is certainly the impression we are getting from the RBA. Unfortunately though, those irresponsible debtors are everyone’s liability in this current climate, so you sorta have to have some sympathy for the RBA there.

        As for dishonesty – they’re dishonest all the time! They’re pendulum-like rhetoric has been so all over the place, how can one take them for their word when one day they’re telling us household debt is a concern, and then the next day they say house prices are normal and the current mortgage debt levels are sustainable.

  8. Doesn’t this just recognise that that target inflation band is in fact a band, with an upper bound and a lower bound. The later seems to be ignored in Bullhawk commentary about RBA dereliction of duty.

    In that context, this decision doesn’t reflect an abandoment of inflation targeting, just a view that infation is on its way back into the band and will test the lower boundary over the medium term. Therefore it cannot be brought back in-band any quicker without overshooting massively on the underside.

    • It’s a band with a fuzzy edge, plus or minus a smidge with a bit of room for error depending on Steven’s waters…

  9. The fall in house prices in all capital city (minus Sydney) means inflation have to get a lot higher before the RBA will act. “Deleverage” means people are reducing their ‘debt to asset’ ratio, and a drop in asset price will cause them to save even more. Imagine this scenario : RBA raise interest rate, and then house prices falls through the floor by 15% in the next quarter. It’ll be very ugly.

    I also expect the unemployment number to go up in the next few month. There have been a lot of layoff recently, and the number of stores being ‘rennovated’ in Westfields is rather scary. It’s worse than the GFC.

    • “It’s worse than the GFC”

      It IS the GFC.

      The GFC didn’t finish, the can was just kicked down the road a few years until now.

      • exactly.

        it is GFC phase 3 post gov stimulation.

        the same dramas are playing out around world — US, UK, China …

        can gov save this mess?! socialise private debt into public debt, QE1/2/? blind eye on inflation?

        we shall see…

  10. What are the policy recommendations in a situation where:

    1. Inflation is mildly elevated

    2. Unemployment seems likely to rise.


    3. There is plenty of Disleveraging/Deleveraging due to high household debt.

    If what happened in Japan and elsewhere is any guide.

    1. Cutting interest rates won’t work

    2. Inflation will eventually sag like granny’s knickers so there be no apparent reason to increase interest rates.

    3. The only source of employment growth will be fiscal make work schemes.

    Perhaps – a dose of castor oil is a better option than limping along in a zombie land for a decade.

    Don’t cut interest rates to try to ‘help’ the debtors. Keep them at neutral setting – about where they are now and let the debt-cards lie where they fall.

    Certainly guarantee deposits and social security payments, but flush the system of debt as quickly as possible and let the market re-allocate the assets of the debt crippled to the debt free.

    It sounds harsh but are there really any easy options, that have been shown to work, when there is a major debt bubble.

    • There are no ‘easy’ solutions.

      Your best bet is to cut the cash rate, and allow APRA to place a levy on mortgages on investment properties, even placed on retrospective loans, as well as an MRRT. Additionally a shifting of marginal tax rates at the lower end, such as $25,000 tax free threshold and 30% moved to 25%.

      This slows down asset prices in the two most destructive areas, Houses and Holes, and lowers costs for business, though this will invariably get gamed and a bubble will form elsewhere.

      Additionally, with much lower real interest rates, consumer spending with the absence of easy credit, (the home ATM being turned off) should see the velocity of money increase at the right levels.

      However, I am prone to let the whole thing burn down, I am young enough to recover, Baby Boomers are not, and quite simply, anything more than kerosene bathes and a vegetarian diet is too generous for them considering the pain and waste they have inflicted.