Chris Joye appears at AFR the afternoon with advice for the RBA:
For the avoidance of doubt, the central bank’s easing bias remains intact, although another cut is not imminent and remains data dependent. The RBA is pleased to see better global data and likely believes recent Chinese indicators put paid to the notion that the Middle Kingdom cannot deliver 7 to 8 per cent GDP growth.
I’m not sure why it would put paid to that. China is only growing because it isn’t rebalancing. The real test of that lies ahead not behind. In the mean time, the problem is:
Blind Freddy can see we are embarking on a housing boom. Where else are savers going to stash their money with the cash rate at 2.5 per cent and the most attractive term deposits offering a miserly 3.9 per cent?
Ironically for a central bank that has lambasted others for blowing house price bubbles, the longer Australian borrowing costs remain at these lows, the more likely families will start to think this is indeed a “new normal” that will persist indefinitely, as bond bandits would have us believe.
There is a Sydney property boom, not an Australian one. Melbourne is a little restive but its poor fundamentals should hold it back. Perth’s boom is slowing and usually ends with commodity busts. The other capitals are all flat. The NZ experience of financial repression and housing suggests that supply restricted markets can run while much the country remains in the doldrums. Not that the RBA should be fooling around with this and tempting fate. Finally Joye says:
A final dynamic at play is a global cringe for Aussie assets that the RBA is probably not displeased to see (as it puts downward pressure on the currency).
…UBS’s head of foreign exchange strategy, Mansoor Mohi-uddin, told his clients on Saturday that they should “stay short” the Aussie dollar, especially against the New Zealand kiwi.
Exactly right, they should. But it would all happen much more smoothly, with far less risk, if the RBA simply did what the RBNZ has already done and install macroprudential rules. Mr Joye has joined the campaign for just this outcome. From May at MB, Mr Joye said:
“I spoke to the RBA directly last week and warned them that I think the cheapest borrowing rates in history are going to inevitably force them to follow the RBNZ’s lead and regulate (with APRA) lending more tightly (eg, through changes to risk-weights against high LVR loans).
There is a fundamental conflict between banks carrying 60-80 times leverage on their home loan books seeking to maximise credit growth and RoEs and the community’s financial stability preferences.”
Excellent advice. I will only add that the move will need to come from APRA, the RBA and ASIC to incorporate the non-bank lenders.
It is all the more pressing because rates are going to go lower still, or I’m a monkey’s uncle. From Bill Evans:
As expected the Reserve Bank Board decided to keep the overnight cash rate on hold at its September meeting.The Governor’s statement contained probably the least number of variations from the previous statement (August board meeting) that I can remember.While there was some additional insight into the Bank’s approach in the minutes of the August meeting that insight was not repeated in today’s statement.
Of most importance to us was the comment in the minutes: “… members agreed that the Bank should neither close off the possibility of reducing rates further, nor signal an imminent intention to reduce rates further”.
Today’s statement repeated the more “neutral” wording that was used in the August statement: “The Board will continue to assess the outlook and adjust policy as needed to foster sustainable growth in demand and inflation outcomes consistent with the target”.The only ‘new’ concepts introduced in this statement were: “Australian institutions have ample access to funding markets”; and the governor included more emphasis that further effects from the rate cuts can be expected “including from the declines in rates seen over recent months.”
The second ‘surprise’ from the statement is that the Governor stayed with his description of growth (used in August) of “a bit below trend”. That contrasts with the minutes to the August meeting: “economy was growing at a below trend pace”. It is reasonable and significant to assess whether the governor believes growth is “a bit below trend” or “below trend”. Given that the Bank has lowered its growth forecast for 2013 from 2.5% to 2.25% (August Statement on Monetary Policy) then I would have thought that 2.25% is worse than a “bit” below trend , assuming the Bank still sees trend as 3-3.25%.
Views on: global growth, “bit below average”; global financial conditions, “very accommodative”; unemployment rate, “edged higher”; inflation,”consistent with medium term target”; labour costs, “moderating”; pace of borrowing, “relatively subdued”; and the Australian dollar, “remains at a high level” were unchanged from August.
Conclusion.
We were a little surprised that the Governor stuck with his description of growth as a ‘bit’ below trend given the evidence from the minutes and the recent growth downgrade,
It was also noticeable that the more dovish description of policy options which we saw in the minutes was not adopted in this statement. Given a clear preference from the Bank for a lower AUD the maintenance of a slightly dovish stance would have been more constructive for putting some gentle downward pressure on the AUD than to repeat the clear neutral stance of August.
However, with the timing of this meeting so close to Saturday’s election the Board may have preferred to adopt as neutral a stance as possible.
We expect a more stimulatory approach to the wording for the next meeting in October. It has been our view for some time that the next cut will come in November. Certainly today’s statement gives no encouragement to those who expect a cut in October.
However the key themes in this statement, which were repeated from August, point to downside risks for rates. Recall that central banks usually frame their statements following a policy move to justify the move. In the case of a rate cut the statement can be expected to highlight observations around economic weakness. This statement which is virtually identical to August has not been framed around justifying the August decision and yet the downbeat themes have been retained.
With weak business investment and confidence; subdued consumers; contained inflation pressures; and a softening labour market; and an AUD that remains ‘high’ we are comfortable with our call for a further cut in November.
Yep.
