Goldman: RBA setting up rate cut


Tim Toohey on the SoMP:

The August Statement of Monetary Policy was an interesting mix of significant shifts in the RBA growth and inflation forecasts and more incremental shifts in the tone of the accompanying text. Our approach has historically been that the RBA’s real intent in the Statement of Monetary Policy is signaled by its forecast changes rather than its text. The key question is does this add up to a reinstatement of an easing bias? We think the answer is that it is another step along that path, however, wewould prefer to see the RBA Governor confirm this in coming weeks. From a GDP perspective, the downgrade of annual economic growth of 25ppts through December 2014 through to December 2015 may not appear too meaningful in isolation, however, the RBA downgrade of non-farm GDP growth of 50ppts in 2015 and a 50ppts reduction off the high end of the June 2016 range is meaningful. From an inflation perspective, downgrade in underlying inflation by 50ppts by mid-2015 will be the key focus, and takes the RBA’s underlying inflation forecast into alignment with our forecasts. The larger downgrade in headline CPI of 75ppts in the year to December 2014 and June 2015 in addition to a 25ppt reduction in the year to December 2015 indicate that not only does the RBA expect the full impact of the Carbon tax removal to be passed on, it expects general inflation pressures to be subdued. In short, the RBA has outlined a growth and inflation profile that enables it to lower interestrates in 2H2014. We continue to hold our forecast of a September cut, and note that it is historically unusual for the RBA to undertake meaningful shifts in its key forecasts and leave interest rates unchanged in the subsequent meeting. We will continue to assess the risks to this view in coming weeks, however, we continue to believe an interest rate easing is likely through 2H14.

It could come in September. The meet is the day before Q2 national accounts which are likely going to show a growth wipe out. I still say they’ll move to an easing bias first and then cut the month after so my bet remains October or November. Q3 CPI is out late October so November also has that to recommend it given the release will likely show inflation falling fast. A little longer pause to let housing slow will help too.

Interest rate markets priced in 14bps in cuts in the next 12 months on Friday, a new low.

Houses and Holes
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  1. Due to the mistaken belief by the powers that be that rate slashes are stimulatory to an entire economy, I think you’re on the mark HnH.

    Let’s continue to ignore millions of savers who would spend gladly if their wealth kept up with inflation (hint: not CPI) after tax.

    • You’ve counted those savers who rely on interest on their savings for income, yourself have you Andy, or maybe there are some ABS figures you can point us too ?

      • Good point and I’d love some help with this if anyone can – including similar stats for borrowers.

  2. johnathonbbbrown

    Great. Lets give the speculators and half the population who are technically bankrupt FREE money mate. F uk those who have money in the bank and NO debt.
    Lets see if we can create the BIGGEST BUBBLE IN HISTORY.

  3. Do those who control monetary policy know they are unwittingly calling for the future deflationary environment they are so anxious to avoid? I doubt it! Bringing forward demand by lowering the cost of present day money, starves the future of that same demand when we get to that same future. Then what? Future demand falls and prices fall to replace the ‘free’ money as the only stimulus left to sales . We have brought-forward demand for several decades now, hoping for a magical solution to our dwindling economic performances. At some stage today’s and yesterday’s spending has to be replaced by earnings; real earnings, not fictitious gains from speculation etc. Until we have a productive economy ( all of us) then low interest rates cannot resolve the very problem that Governments are trying so hard to resolve. The component that has to fall isn’t interstate rates – it’s wages. How many people do we all know that are now saying ” I’m not going to make it. I haven’t got enough to get me through. I’d better buy some property as my only chance to escape…” I know many. I’d be surprised if you don’t too…..

    • @Janet

      This game has been going on since the 80s, when the baby boom magic started washing off.

    • Yes Janet.

      Your analysis (the other day) of the 1970’s to now shows it can last 50 years.

      Then it’s either a bust or a Japan style low growth economy. Or both.

      • The big difference is that …Japan went into their current malaise in good shape. They’d actually done the hard yards after the War, and had real savings to collectively live from (and a falling, homogeneous population to boot!). We, on the other had, don’t……

      • It’s the stuff that we run our economies on! You know…the Carry Trade and all…. –Their accumulated surplus from work and production over cost…. that we sponge off…..As I suggested the other day, the RBA has a disaster on its hands…..

      • That’s just crazy talk! Our Aussie economy runs on high octane housing and beer. Yeah, it’s true, we rule that much.

    • Sorry Janet i do not agree with your statement “The component that has to fall isn’t interstate rates – it’s wages.” what is the point of falling wages? that would reduce demand and is deflationary.

      My opinion is the value of the currency must fall increasing the cost of imported goods and wages must rise.

    • Janet, keep up pushing this point, you are entirely correct. but how the big picture pans out, I just don tknow WW

  4. There is very little discussion about the damage that low interest rates do.

    IF lower interest rates create benefit without drawbacks THEN I want to see the interest rate set to 0% and kept there forever. Since this is not being done, I would like to be told why not. What is the damage that low interest rates can do? might do or have done already?

    • Great question – Take a look around the world at what low/zero interest rates have done in recent years & are doing now. No theorising required whatsoever – We are surrounded by the facts and evidence of this failed policy.

      • Low/zero interest rates have prevented the rest of the world collapsing in to a painful, protracted depression. There will still be a temporary depression but it would have been a black hole instead of just a depression, if high interest rates had prevailed.

        Any suggestion that low interest rates have caused economies to go backwards is simply the view of whiney gen x housing losers or filthy rich retirees simply trying to talk up their investments. Nothing more nothing less. And they thought we wouldn’t notice.

      • We have not been saved by low interest rates at all – all it has done is to temporarily side step the real issues facing the world so that we can just keep adding to the debt pile – which has grown by more than 40% since the GFC.

        Low interest rates have only help to mask the real problem which is our growing debt pile and over leverage while chasing risk due to those low rates !

        When the GFC makes a second calling it will be the low level of interest rates and growing debt burden that will make this whole show go off bigger than the fourth of July.

        A mere doubling of interest rates from such historic lows will leave our debt burdened world in one hell of a f*cking mess – much bigger than the last one.

      • The full effects (good and bad) of this massive experiment won’t been known for years. I’m not saying Fed and other central banks shouldn’t be doing what they’re doing, but I agree with Bob, I think it’s too early to say that we’ve truly dodged anything.

  5. So the RBA dropped interest rates from Sept 2012 for 18 months, increased the housing bubbles in Melb and Syd, meanwhile real unemployment rises – and now they want to do more of the same? Beggars belief.

    • Yes……..sometimes I just can’t take MB seriously when they have been a major cheerleader for lower interest rates for quite some time now.

      And then they like to get the masses going by banging on about our out of control property market.

      Start hiking you cowards and take the resultant collateral damage and just suck it up…

  6. Rate cut is guaranteed, now that the foreign investor thing has been blown open and China cracking down on the naked officials and looking for ways to get their money back.

    Pollies have $300 million in IP’s, they would want to unload those or protect them at any cost.

    Sure drop interest rates, as long as Stevens shows himself in public so we can extract our pound of flesh when this all comes apart, same goes for any officials.

    When the rioting starts we will be front line with our sharpest pitchforks !

  7. The squid calls for more pro-cyclical ZIRP-pumped asset price inflation.

    Well they would, wouldn’t they.

  8. Yup, my bank’s just dropped its deposit rates 20 bp. Now I’m in even more negative RAT territory. What’s the best way to hedge without having the speculators screaming for my savings when it all comes crashing down?