Australian interest rates up or down from here?


Find below two interest rate arguments that summarise where the economy and monetary policy is at. My own views are at the end. And no, I will not be lowering my trousers. First, the bearish case from Westpac:

RBA holds rates steady; but retains easing bias; next move down

As expected the Reserve Bank Board decided to leave the cash rate unchanged at 3.00% at its April meeting.

Given that there has been some discussion in the media around rates rising this year we were very interested to see whether the Governor indicated whether he still had an easing bias. That was confirmed by repeating the term: “The inflation outlook, as assessed at present would afford scope to ease policy further, should that be necessary to support demand”. We read this as indicating that the Bank’s current stance is that they see it more likely that the next move in rates will be down rather than up. Of course a further assessment of the inflation outlook will be available on April 24 and that will be an important input into whether the Bank still sees scope to ease. Our early forecast is consistent with inflation remaining contained and the Bank’s medium term target for both headline and underlying measures to be retained at 2.5%.

The second area of considerable interest from our perspective in the statement was the official assessment of the surprise jobs growth in February of 71,500. Comments from Bank officials following that print around sampling variability and continuing prospects for rising unemployment indicated to us that the number would be severely qualified. In the Governor’s statement in March he referred to the labour market as: “with the labour market softening somewhat and unemployment edging higher conditions are working to contain pressure on labour costs”. In today’s statement he is much more concise: “labour costs remain contained”. This suggests that the Governor is not prepared to accept that the job report signals an improving market but he is also not prepared to publicly dismiss the number. He has left the issue open until we see further evidence around the labour market.

There were some issues around the domestic economy where the wording was a little more positive than in March:

1. “Dwelling investment appears to be slowly increasing” (March) vs “dwelling investment is slowly increasing” (April);

2. “Demand for credit is low” (March) vs “Demand for credit has also remained low thus far” (April);

3. “Investment generally outside the resources sector is relatively subdued though recent data suggest some prospect of modest increase during the next financial year” (March) vs “the near term outlook for investment outside the resources sector is relatively subdued a modest increase is likely to begin over the next year” (April);

4. “Though the full impact of this [easing in monetary policy] will take some more time to become apparent there are signs that the easier conditions are having some of the expected effects” (March). Arguably  the following statement is stronger: “there are a number of indications that the substantial easing in monetary policy is having an expansionary effect on the economy” (April).

On the other hand there appears to be a little more urgency around the slowdown in mining: “the peak in resource investment is approaching” (March) vs “the peak in resource investment is drawing close” (April). Secondly: “the exchange rate remains higher than might have been expected” (March) vs “the exchange rate, which has risen recently, remains higher than might have been expected” (April).

On the international front there appears to be little recognition of the threats posed by Cyprus to Europe. Global growth is still described as “a little below average for a time” while “the downside risks appear to be reduced”. That is a less confident commentary than “downside risks appear to have lessened over recent months” (March). Unlike March where financial strains in Europe are described as “considerably reduced” there is no commentary on developments on financial strains but Europe is now described as: “remains in recession”. Whereas in March financial markets were described as “remain vulnerable to occasional setbacks” they now “remain vulnerable to setbacks” implying a higher probability of these developments.

For the domestic economy there are a number of more positive nuances in this statement than we saw in March around dwelling investment; non mining investment; and the overall impact of the easing in policy. The Governor has sidestepped the issue of the February employment report but is no longer prepared to refer to a softening labour market or rising unemployment. On the other hand there is a little more urgency around the peak in the mining boom while the rising Australian dollar continues to represent concerns.

By retaining the easing bias the Governor is signalling to us that in the Board’s view, despite some more positive nuances, rates are more likely to be cut than increased at the next move. He has not moved to a neutral bias or used language to suggest that he expects rates to be on hold for an extended period.

Accordingly, it is our view that the arguments around both domestic and international economies still support lower rates. Accordingly we retain our position that rates are likely to be cut by 25bps in June, or shortly thereafter.

Bill Evans

And next from HSBC:

RBA Observer Update

Tactically dovish

The RBA held its cash rate steady today, at 3.00%, as expected. The statement was very similar to last month’s, reiterating that ‘the inflation outlook, as assessed at present, would afford scope to ease policy further, should that be necessary to support demand’. Tactically, it pays the RBA to be dovish, particularly given their concerns about the continued high AUD. But a dovish bias does not mean they will necessarily follow through with cuts. With demand already picking up in the interest-rate sensitive sectors of the economy, we remain of the view that the easing phase is done.


– The RBA held the cash rate steady at 3.00% today (all of the economists in the Bloomberg survey expected a hold decision and this was 96% priced just prior to the announcement).

– The statement was very similar to the previous one in both tone and content.


The decision to hold rates steady today was no surprise. The statement was also very similar to last month’s, suggesting that the RBA could cut the cash rate further if needed, given their outlook for inflation to remain contained.

As it did last month, the statement noted that the loosening of monetary policy during late 2011 and 2012 is having an expansionary effect, but that, on the other hand, the AUD remains higher than might have been expected. The RBA is clearly still somewhat concerned about the high level of the AUD.

Given concerns about the high AUD, it pays the RBA to be dovish. But this does not necessarily mean that they will follow through with cuts. We remain of the view that the easing phase is done.

Bottom line

The RBA held the cash rate steady at 3.00% as expected.

The statement reiterated that they could cut further if needed. We continue to expect that they will not need to cut further and maintain our non-consensus view that the easing phase is done.

Paul Bloxham, Chief Economist (Australia and New Zealand)

My own view is that neither of these is right. I do not believe that the current property “recovery” is anything like as strong as it appears to be. I nonetheless expect it to continue at a diminishing growth rate as first home buyers begrudgingly return. I am very suspicious that we will not see a big enough rise in housing construction.

But the big issue in the second half is not Europe, it’s China, which is serious about  shifting from fixed asset investment growth drivers. As an iron analyst I therefore see a second half that brings another down leg in the terms of trade that coincides with the peak in mining investment and the election of an austerity minded Coalition government.

My base case is that rates are thus going to fall further in the second half and again next year. I expect a bottom at 2-2.5%, largely because the RBA dares not cut any further for fear of capital flight. The main risk to my view is I’m ahead of the curve on China.

Then the fun may begin in earnest as the dollar falls and inflation rises.

Houses and Holes
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  1. I agree that China is serious about shifting from FAI – but over a period of years – expect an announcement soon from China to give direction on future urbanisation plans thru to 2020 (both construction and social welfare) and some further understanding of Construction (but not Real Estate) as a pillar sector.

  2. But the big issue in the second half is not Europe, it’s China, which is serious about shifting from fixed asset investment growth drivers.

    FWIW, I saw Bloxo on Sky Biz today talking up the China recovery “supporting iron ore prices” or somesuch. He really lives on some other planet. Planet optimism perhaps, where everyone is under 40 and no-one has experienced a recession in their working lives.

  3. ‘that coincides with the peak in mining investment’

    Where are we with that? Still ahead or behind?

  4. “Of course a further assessment of the inflation outlook will be available on April 24 ”

    An assessment of the inflation outlook requires that we look forward at all the factors that might cause inflation. Indeed one ought say ‘continue to cause inflation’ We just keep looking in the rear view mirror and hit the accelerator. We completely ignore what is actually giving us the APPEARANCE of lower inflation and what might happen to that factor in the future.

    We already have inflation way above the RBA’s range. We are just creating an artificial environment to make it look OK. As a few opined elsewhere today the last thing the RBA wants is a lower A$.

    The cost of this artificial environment is the further total wanton destruction of rural Australia, a bleeding regional tourist industry,the dismantling of any and every manufacturing facility that is not currently on the mining investment train, the sales of any and all farming, manufacturing and mining assets to foreign interests.

    As suggested by the inflation measure used to determine interest rates should be non-tradable inflation. (Leaving aside, for the moment the arguments involving savings vs borrowings CAD’s etc.) Even then house costs should be a part of that measure.

    What we are doing now is trashing our economy to satisfy some BS inflation measure to keep our rates low to continue to maintain our over-consuming lifestyle and our over-inflated sense of entitlement.

  5. FWIW I think they WILL cut further. Even worse they will ignore inflation using words like ‘look through inflation’ There is no way out of this. We will just keep cutting interest rates…until we can’t. We have no other policies….not a single one.
    It’s effing depressing.

    The answers lie back in time.

      • It’s a toss-up I agree and you may well be right. My thinking on the rest of the world is a little different to the rest of you. If that outlook is benign, as Stevens seems to think, then you’re right. OTH all Central Bankers have all thought this is benign all the time since before the onset of the GFC.

        On the other hand I think the western world’s problems are more deep-seated than business cycles or Balance Sheets. It will be Hungary Slovenia Netherlands Luxembourg Greece Portugal Spain Italy France Japan, UK etc etc etc all blowing up, not necessarily in that order and not necessarily one after the other.

        In that environment RBA will just cut regardless. It’s the economic thinking of the past 50 years accepted by all CB heads. It won’t change.

        (Again just FWIW for my different point of view around here)

        • P.S. Surely if Stevens had a firm view on inflation he would look at non-tradable inflation?
          Looking at overall inflation is just shallow Mickey Mouse tripe.

      • Judging by how much prices have gone up the last few years it don’t think it’s that stern.

  6. “… the RBA dares not cut any further for fear of capital flight.” The underlying reason why rates won’t fall, and should rise from here. Perhaps we could debate timing and reason, but not the outcome. When the capital flight starts, which it will for one reason or another, the dollars will head for that famous elevator shaft and anyone with unsustainable debt is going to get hammered.

    • “The drought gripping the North Island and parts of the South Island (of NZ) is expected to cost the economy up to $2 billion, Prime Minister John Key says.”..there are challenges to face,” he said. “We don’t yet know how it will affect factors like inflation, interest rates and the exchange rate.”
      How consoling. A Government that is going to wait and see what happens, and react accordingly; maybe. From a Government that some see as making macro-prudential changes to guide the economy forward..and people wonder why I doubt there will be any changes at all!

    • Janet..maybe NZ and Aus will be a little different? We’ve still got a few (something less than 20%)mines and a lot of farmland to flog off before we have to really start worrying?

  7. Look at that election worm on the right! What have the dopes in the Labor Party got to lose.

    Why don’t they actually try and do something meaningful that might stop us getting burned alive by the private debt before they get turned to road-kill at the next election.

    Surely a noble death is preferable than crawling on your knees to the end.

  8. ” I do not believe that the current property “recovery” is anything like as strong as it appears to be.”

    That is my impression in mid western Sydney.

    A slow stream of investment properties coming onto the market possibly being bought by other investors and foreign buyers but otherwise fairly quiet. I haven’t seen much evidence of ‘gotta buy now’ thinking.

    The changes to the FHB rules in NSW may be partly the reason but I think people are a little more cautious about a life time membership to Club Debt.

    The RBA will give it another shake or two before they give up.

    • Let’s hope you’re right Pfh. Really, it is only the common sense of the average Australian than can save us now.

      The politicians and the RBA would lead the country to private debt hell without blinking if they could.

      Hopefully, potentially debt slaves will look at what happened in the US, in Europe and around the world and think twice.

      • aj…since when did people with common sense get any input? If they did pfh would be Head of Treasury or deputy to Leigh Harkness. Whether pfh would want the job might be another matter altogether.

        • I’m not suggesting anything so incredible as someone with common sense and integrity gets power 😉

          I’m suggesting that the last hope is that individuals exercise common sense and resist the siren call of the politicians luring them into private debt. (whilst conceding it is fairly forlorn hope).

          • Absolutely aj,

            That really is the only hope.

            Restraint by the public when faced with RBA debt bait.

            It can happen – a couple of generations attitudes to debt were affected by the 1930s and their attitudes stayed that way for decades.

            Clearly, events overseas have had an effect locally over the last few years and they will continue to do so.

            How many Australians of Irish, Greek and Cypriot descent still feel the same about using high levels of debt as the path to wealth as they did 5 years ago?

    • 60-100% haircut on your uninsured deposit or invest in a tangible asset (which may be subject to tax) that may fall in value but not by 100%?

  9. My info and contacts tell me that SMSF are buying and are in lots of cases, running a loss/NG inside the funds in order to increase the cap contribution levels….

      • A SMSF needs a 30% deposit for property, so the gearing is high and the types of property being bought are the good solid rentals. If you increasse your cap by $100k and pay only 15%, instead of your top tax rate, well, you win now. On retirement, the SMSF is paying out the loans to make them good retirement earners…. From what I can see, nad hear, it is certainly a rort that needs a closer look at…

    • They can offset the tax within the SMSF, they cant change the deductible caps. Should get the SMSF coach to clarify that. With the proposed increased taxs within super, you can see that further property within SMSF will increase, which is what I suspect the changes are all about anyway, the creation of new/debt/money

  10. It is NOT RBA, nor Australian politicians elected by people, it is the market decides. RBA can only follow. Short term Commonwealth bond yield gives clues on next RBA move.

  11. Politicians can easily take steps to prevent hot money flowing through speculators to established housing.

  12. “Then the fun may begin in earnest as the dollar falls and inflation rises.”


    It would be fun to watch how the RBA will react to it, though I would not want to be in Stevens’ shoes! Standing at a crossroad where one road leads to Greece and the other to Zimbabwe does not sound particularly exciting.

  13. It always seems to me like the RBA fears the AUD falling more than the hollowing caused by the high AUD, and I have been wondering like HnH if that is because of fear of foreign capital leaving as China slows and mining investment peaks/peaked. But now that there aren’t many safe harbours, let alone havens left, could it be that AUD will not fall as far anyway, as it would have if the rest of the world was in a better shape? It will be interesting to see which way the pendulum swings. If the rates are hiked, I would think of it as a sign that foreign money has been showing signs of leaving and if the rates go lower then there is enough foreign capital staying and coming in. Silly and simplified thoughts probably.

  14. Cutting interest rates is about as effective as pushing the accelerator on a Trabant from 90% the way down to putting it flat to the floor.
    You just ain’t going to see any increase in speed.

  15. My understanding is China front-end loads at the start of the year, so this bodes well for Australia-Chinese trade relations (as this carries through to GDP/CAD quarterly figures) but I note that they are gradually decreasing – the chinese fiscal policy that is.

    I also think it worth noting when the govt said they would no longer pursue a surplus there was a short stock-market/commodity rally and with currently good looking retail figures, there seems to be a view in that direction again.

    Nice in the short term, but nothing to say we’re in for a good long term, yet.