Lots of prognostication, bragging rights and blather this morning about interest rates and still no clear sense of why the RBA held fast. My own view is that it comes down to fear. Fear of over-stimulating. That is, after all, what the bank did the last time we faced a global economic slowdown in 2009 when it sent house prices soaring an astonishing 20% over the year. Interest rates were at 3% back then and would have returned there yesterday with another cut (though standard variable mortgage rates are still 80bps above their 2009 lows).
This boils down to one thing for me. The RBA still thinks we are different. It still believes that Australians are addicted to housing and share speculation. As one RBA official once put it to me: there is always some idiot ready to borrow.
Let’s run through the reasoning in the statement. Some have put the pause down to the carbon-related inflation burst but the RBA said it believed not only that inflation is contained but that a weak labour market will keep it that way, even if in the longer term we need higher productivity growth.
Others have pointed to a shift to more positive international data, especially in China, and the RBA weakening its rhetoric about the end of the mining boom. But that is a furphy. The mining boom is over whether China grows at 7% or 10% in the next year. As BHP has made abundantly clear, the shift is structural not cyclical. Supply has caught up. The end of the mining boom is nigh and the RBA knows it.
No, the paragraphs of the statement that make it clear why they paused are these:
Over the past year, monetary policy has become more accommodative. Interest rates for borrowers have declined to be clearly below their medium-term averages and savers are facing increased incentives to look for assets with higher returns. While the impact of these changes takes some time to work through the economy, there are signs of easier conditions starting to have some of the expected effects. Business demand for external funding has increased this year, the housing market has strengthened and share prices have risen in line with markets overseas. The exchange rate, though, remains higher than might have been expected, given the observed decline in export prices and the weaker global outlook.
Further effects of actions already taken to ease monetary policy can be expected over time. The Board will continue to monitor those effects, together with information about the various other factors affecting the outlook for growth and inflation. At today’s meeting, with prices data slightly higher than expected and recent information on the world economy slightly more positive, the Board judged that the stance of monetary policy was appropriate for the time being.
The lest few sentences are a convenient excuse for the first few. The RBA is afraid we’re already warming up for a levered charge back into houses and shares. In my view this underestimates the structural shift to higher savings rates. To me, the effect of the GFC shock and the weight of negative demographics on asset prices is no different here to the rest of the Western world, but the RBA still doesn’t believe it.
Fair enough, but this contradicts its own policy statements. The so called “recovery” in housing is nothing more than a leveling off in prices with an almost imperceptible uplift in mortgage issuance. To describe it as muted would be friendly. Credit aggregates and new home sales are still falling and will not recover, the bank’s stated goal, until house prices are rising.
If rate cuts are going to be calibrated to a deterioration from current levels of activity, that recovery will never come. It means growth next year will be lower as a result. Meanwhile, the dollar will continue to hollow out industry and assuredly finish off what’s left of the mining boom. In effect, we are now waiting for Dutch disease to do us sufficient damage that we can cut rates again. We are killing the very industries we will need as the ‘borrow and consume’ and ‘China stimulus’ growth models pass.
It’s a high price to pay for fear.
