Rates are not at an emergency low

The AFR has characterised today’s interest rates cut as an “emergency low”. In his post-cut press conference the Treasurer called this a “scare campaign” and argued that rates are largely responding to fiscal tightening and that growth is running close to trend.

Neither of these positions is right. Interest rates are not at an “emergency low”. We are not in an emergency. That this cycle is different to that which transpired in 2009 is obvious. Fiscal policy is completely different, the global and local economy’s are completely different and consumer behaviour is also different. Aside from anything else, owing to wider spreads, actual mortgage rates are still 50-60bps above GFC lows.

But neither are we in some wondrous fiscally delivered perfect economy (that The Kouk and Treasurer would have us believe). Both the emergency and fiscal management arguments characterise the level of rates as a cyclical issue. It is not.

We are in a new normal, where the desire to borrow for investment and/or consumption is simply lower than it used to be. Add to that that the banks cannot finance high loan growth any more, the world (investors, ratings agencies, regulators) will not lend them the money, and it becomes clear that lower credit growth and interest rates are a structural change.

Now, once you throw in cyclical factors, like the levels of commodity and dwelling investment, you can start considering where an emergency low will be when the mining investment starts to diminish mid next year. In my view it could be another 100bps points away but it is at least 50bps.

That will be an emergency low.

P.S. Alan Mitchell puts it all down to this:

A further reduction in the rate is expected by the markets and probably will be necessary if the business and consumer is further damaged by the failure of the Europeans and Americans to cleanly resolve their immediate sovereign debt and fiscal “crises”.

Give me a break.

David Llewellyn-Smith
Latest posts by David Llewellyn-Smith (see all)


    • Deus Forex Machina

      That’s kind of the point don’t you think? and the one I reckon David is making – this isn’t an emergency level to be exited quickly but rather that overused term (by me at least) a paradigm shift in demand for debt (credit is a misnomer)which means to lower traction and weaker tranmsission mechanism for policy.

      Unfortunately for many SME’s though not much is going to help near term

      • this isn’t an emergency level to be exited quickly

        Ah … yes indeed, fair point. Thanks for the clarification. I failed to click that this was David’s gist.

  1. Jumping jack flash

    “We are in a new normal”

    That’s for sure when the rest of the world is running ZIRP forever. 3% is ridiculously high by comparison.

    So what is emergency low in the new normal? When we get to 2%? 1%?

    • Jumping jack flash

      ” In my view it could be another 100bps points away but it is at least 50bps”

      glossed over this bit I think…

    • We won’t run ZIRP (or whatever) forever – people would lose faith in the currency(ies) if interest rates on savings run “too low” for “too long”.

      IRs have to go up, else currency(ies) will get destroyed, IMHO; it’s just a matter of When and Why.

      My 2c

      • Jumping jack flash

        agreed, but that was the announcement not long ago from most of the major economies – ZIRP for the forseeable future, effectively ZIRP forever.

        Not surprisingly the effect wore off pretty quickly and they needed to move to the next item on their checklist.

        Some of that mortgage debt will take decades to repay, and credit is still growing in most places, just at a slower rate than in 2006/7. If they jacked up the interest rates from ZIRP it would be a bloodbath.

    • If this is the new normal, we’d better get use to lower than average retail growth, house price increases, pretty much everything. More to the point, what will the new “average” be?

      • “and down it all goes”

        Would it be fair to interpret this comment to mean that you admit to a danger of, shall we say, a “collapse”, as opposed to a muddle through / managed, gentle decline?

      • You are completely ignoring the other side of the currency pair, THE USD! There’s no way the RBA can expand money supply at the same rate as the US federal reserve.

        This simply means the AUD will continue to strengthen against the USD.

        • And you are being far too literal about how markets work. If the RBA set about printing enough, the pychological impact would outweigh any realty of currency in circulation.

          • lol we are at 3% and you are talking about printing. Get real. Look at our unemployment rate and inflation rate. There is zero justification for printing money.

            One of the few legitimate ways to reduce AUD demand is to pay back government debt so foreigners either invest in the private sector or dump AUD.

            Interest rate cuts, printing money, macroprudential rules all have unintended consequences and worst of all, are all administered by government.

          • I agree that 3% is too low, but disagree that there is zero justification for printing AUD. The RBA should print as many AUD as necessary to supply to the central banks around the world which are chasing the limited amount of AUD. By doing so, the RBA can build up sufficient forex reserves for future use. This printing does not increase the amount of AUD in circulation so it will not cause inflation.

            When the tide turns and the central banks around the world start dumping AUD at discount rates, the RBA has more than enough forex reserves to buy them back at a hefty profit.

          • @Dumpling Less than $200bn of Commonwealth Gov. Securities (CGS) are owned by foreigners. It’s unknown how much of this is owned by central banks but let’s just assume it’s half, so $100bn.

            You want the RBA to print $100bn (about 10% of GDP) and therefore accumulate $100bn in foreign currency reserves.

            The assumption is that the AUD is overvalued at these levels and the AUD will go down in the future. If it doesn’t then the RBA takes huge losses on $100bn when the AUD appreciates. Every 1% appreciation in AUD is a $1bn loss.

            Like I said, every government intervention comes with risk and unintended consequences. The best and most prudent way to take pressure of the AUD is to reduce the size of the CGS market. Remove the product and central banks have nothing to buy.

          • @Capitalist

            Yes, I want the RBA to build up $100bn in foreign currency reserves or more.

            Yes, the fundamentals show that the AUD is overvalued, so it will go down over time.

            And finally, yes, I know that every government intervention comes with risks and unintended consequences. Perhaps in this case the greatest risk comes if the RBA fails to retire the AUD it will purchase back from the central banks around the world. We will need a mechanism to prevent that.

      • The interest rate lever was ‘broken’ the first day it was used as a tool to control the value of the currency.
        The result of these policies is the slowly developing train crash that we are witnessing.

        • Jumping jack flash

          I agree. It is only recently they have tried to use it to manipulate the currency I think.

          Before that I believe they were trying to offer relief to the “battlers” (indebted) so they could still do some shopping each week after paying the mortgage repayment, and it kind of worked for a little while.

  2. “In my view it could be another 100bps points away but it is at least 50bps.”

    3% is the same rate as in the midst of the GFC and tied as the lowest in the last 60+ years.

    In the last 60 years, we had; the Cuban missile crisis, Vietnam War, Nixon shock, two oil shocks, stagflation, fall of the Berlin walls, Iraq war, Dot com boom & bust, September 11, and the GFC.

    I do not believe that now is the worst time in the last 60 years.

    I understand your point that it may be wrong to compare the absolute numbers (3%) across different eras, but then again, what is your rational behind equating 2.5% (your 50bbp away scenario) or 2% (your 100bbp away scenario) to 3% at any of the dark times in the last 60 years?

    • I don’t have the answer. I can only say that as our own trick pony boom ends, the high dollar guarantees that there will be very little to replace it, meaning rates will fall and ultimately the dollar too.

      But rates can’t go too low. CAD must be serviced…

      • Our dollar will fall against what other currency? EUR? USD? JPY? Are they all not the currencies of basket-case economies with debt loads that can’t be repaid and with ZIRP already?

        • Jumping jack flash

          An excellent point.

          We will need to see some actual turmoil before our dollar will fall, not just a bit of low(er) rates. We’re competing with countries that have implemented ZIRP forever, plus have several rounds of QE under their belts.

          We’re way behind on the Things-To-Do-During-a-Debt-Bubble-Deflation checklist.

        • Against all of them (eventually):

          Japan – Current account surplus.

          EU – Current account surplus.

          US – Latest current account deficit of 3.2% and shrinking as oil imports collapse with shale boom.

          Australia – Latest current account deficit of 4.3% and growing as coal and iron ore contract prices roll off to lower levels and export industries wilt under the overvalued AUD.

      • I am afraid that Glenn had just wasted another bullet.

        If I were running the RBA, I would have kept the interest rate in the vicinity of 4% and printed AUD and sold them to the central banks around the world which want it so badly for some peculiar reasons (and had built up the forex reserves in return).

        You *must* print AUD when the central banks around the world are chasing the limited amount of AUD. There is a reason why it is called currency “war”.

      • I do not quite understand your point. Most of the 160% you referred to had already built up by 2007, when the interest rate was much higher than 3%.

        • My point is that the “emergency” level of interest rates is relative both to the size of the emergency and the amount of outstanding debt.

  3. Irrespective – the “emergency Low” mantra will take hold in the media and scare the crap out of Mr and Mrs Max BillPayer- in my opinion, it will more than negate any economic stimulus intended by the RBA.

    • Or as most of my debt laden friends would say, they’re going to flog the hell out of their debt whilst rates are low. On the other hand my friends who are debt free and reliant on the interest based income, their wallets just tightened. Some stimulus.

    • Deus Forex Machina

      Not materially – still too little relative to size of AUD trade to impact AUDUSD and no appetitie from either side of politics for intervention

      TWI weights last week showed 39%+ CNY and JPY USD only 9.85% roughly the same as the Euro.

      So AUD high but its not all about the USD in the long run

  4. GunnamattaMEMBER

    As Deus Forex Machina noted earlier today the IMF has at long last come to terms with the post – GFC capital flow reality and acknowledged that there is a place for some form of capital controls…


    The Government and RBA need to use this to have a look at whether monetary policy as they know it (interest rates) is addressing the problem (high AUD) – it isnt as far as I am concerned.

    The -25bp decision today is a short step on a road to nowhere…..a palliative.

    It wont do a thing for the AUD (The real problem), which means that it increases the risk of an economic shock from an overvalued currency (vis what the economy is structured for), and it fries the only sectors capable of redressing Australias major economic issues over the longer term (import competing sectors, globally exposed sectors – whatever you want to call them).

    The other thing to bear in mind is that any sign of a serious economic shock (if you assume we arent there already) in an election year is going to have some interesting socio-political effects.

    • I know this sounds evil, but I was really hoping Labor got back in at the last election (after 3 years of economic spruking from Wayne Swan/Kevin Rudd) so Joe Public could see that the boom in credit creation due to Rudd/Swan stimulus was in fact disgraceful mismanagement rather than good economic management as claimed.

      I fear Labor will leave office at the next election just before the real trouble starts with the Libs left to holding the steaming hot turd (not that the Libs are innocent of credit boom politics).

        • I don’t like Abbott or Joe type 2 diabetes Hockey.

          MT is thier best man and that’s from someone who wouldn’t touch Lib.

          Btw gents, where’s our third option? I hate polarized either or Yank style politics.

          Who’s man enough to be Australias Nigel Garage? And if you don’t know who that is spend the best five minutes of yr life on YouTube.

      • (not that the Libs are innocent of credit boom politics).

        Now there’s a candidate for understatement of the year !

  5. Gunnamatta its not a step on the road to nowhere. Its a step on the road to 2.5% and by then we will know whether non mining investment is picking up or dwelling construction is. If neither, then its on the road to 2%…everyone needs to take a Bex and remember that monetary policy has long lags and maybe some broken circiuts-esp in the new world that HnH describes.The dollar will correct in time.

  6. We are not in an emergency

    That’s not an emergency. If China blows up, I mean really blows up, we’ll be going ZIRP baby.

  7. ONe of the guests on Squawkbox Europe said that the 0.25% rate reduction had IMF currency reserve written all over it. Had the RBA not moved the AUD would be about 105-106.

  8. Will any financial companies give up the 50-60bps over time or is this how it’s going to be into the future?