Bloxo addresses RBA wedgie

Following yesterday’s RBA wedgie of bullish economists, Bloxo responds:

The RBA cut its cash rate to 2.25% today, in one of the most finely balanced decisions in many years. Going into the meeting, the market priced in a 60% chance of a cut, while the Bloomberg survey suggested that 21 of 27 economists expected a hold, including HSBC. The statement left the door open for further cuts, although it provided little specific forward guidance, with the previous ‘period of stability’ language removed.

The statement said that the cut was motivated by the RBA’s view that domestic demand was ‘overall quite weak’. This is somewhat surprising, as the range of indicators has generally shown that conditions have been improving in recent months, including building approvals, employment, credit growth and underlying inflation. The RBA also noted that the “Bank’s assessment is that output growth will probably remain a little below trend for somewhat longer… than earlier expected”. It is possible that the RBA’s own extensive (and unpublished) liaison with businesses is revealing weakness that is not apparent in the publicly available data. Friday’s official statement could provide more details.

The rate cut will almost certainly boost an already booming housing market. As the RBA noted in the statement, it “is working with other regulators to assess and contain economic risks that may arise from the housing market”. A housing bubble in the Sydney market is now a key risk to the medium-term outlook.

What is less clear is whether the rate cut will lift business confidence, with Governor Stevens noting in December that, even in his view, it is “not that the cost of money is too high”, which is constraining businesses’ hiring and investment decisions. Lower rates do, however, vindicate the market’s pricing and help to keep downward pressure on the AUD, which should support local growth.

Given the RBA’s dovish tone, we now expect a further cut to 2.00%, probably in May, after the next CPI print. The AUD is expected to head towards USD0.70 by H2 2016.

Next cut in March, CPI is irrelevant.

Houses and Holes
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    • Amazed that you bought mig amazed that currency moves so quickly totally speculative play. I sold out at 82 and never rejoined the band wagon going down.

      If I get a much better price i’ll reenter my shorts and judging by that massive kick the bottom is now a strong 7630….

      Wonder what the asian session will bring.

      • migtronixMEMBER

        It’s all a joke. My take is when the central planners took over the result was going to be massive amounts of “money” sloshing around the currency markets to end up locked in assets. So trade currencies, buy equities….

  1. Another rate cut in March? Why not! Bubble….have another cuddle up to Bubble….
    (PS: I must have misread the last line on your earlier post. I would have sworn you wrote ‘Bubble meet Bubble’; but obviously not)

    • Want do you want me to say? House prices should be contained by macroprudential and foreign investor tightening. If they’re not they haven’t been done right.

      There’s more to the economy than houses.

      • More to the economy than houses?

        Like what?

        Even the Governor is clear that the cost of money is not constraining business investment and hiring decisions.

        The RBA are targeting house prices as that is the only real transmission mechanism for lower interest rates to ‘support demand’. Lower rates haven’t affected personal credit. Pumping house hold debt is the ONLY show in town until the LNP get the boot and that only works if prices are rising solidly.

        There will be no effective MP because it weakens the RBA strategy and the only market that would get it would be Sydney anyway.

        If the RBA are really targeting the exchange rate with the cuts and not household debt they would say so.

      • The RBA did not shed a tear as the export sector and import competing sectors were roasted as the $AUS rose.

        In fact they went to great and repeated pains to explain it was nature at work.

        They have made no comments that they believe it is their job to control exchange rates with interest rates.

        What reason is there for the RBA not making it clear that they have changed philosophy so fundamentally.

        Especially when many would probably applaud such a change.

      • Well, they fucked it didn’t they? The whole “structural adjustment” to commodity-led growth was bullshit.

        They’ve been jawboning the dollar down for eighteen months.

      • Really good insight and comment.

        People working day in, day out to make a life for themselves.
        Buying food, building friendships, building businesses etc.

      • “If the…economy is now dependent on marginal lenders and borrowers, then it is exceedingly fragile. The cure for systemic fragility is not low interest rates…it’s a market that transparently prices credit and risk for lenders and borrowers, qualified and marginal alike. ”

      • If you live in a test tube, sure. Hiking rates in OZ will bring on a Depression. That is not a reasonable public policy position, sorry.

        Nobody here is arguing Oz doesn;t need or isn;t going to get a humungus adjustment. It’s how bets to manage it.

      • It’s not an argument, Lorax. It’s a discussion. If you believe that there is a magic way out of this without massive financial pain. Good on you! I hope you’re right. But my view is that it’s unavoidable.

      • Raising rates will cause a depression? No, the epic debt that individuals chose to sign up for took care of that (chicken or the egg!). Slashing rates or holding them at emergency lows just delays the inevitable and causes more inequality and risk along the way. Never a better time as they say.

        @janet: the magic way is called action consequence. If one has taken on too much debt then loss of assets and bankruptcy are fair outcomes. Just like if someone didn’t leverage everything into property and have experienced more than 70% of their purchasing power destroyed in a decade when measured against the home they wish to buy. Both are depressing… Or not.

      • H+H unfunded government deficit spending (or tax cuts) with concomitant interest rate rises

        Please explain why it wont work and why it isn’t the best solution

    • The RBA/Governmet do live in a test tube! Otherwise we wouldn’t be where we are today.
      Interest rates should have been cut to 0% 3 years ago? Yes! And ‘oppressive’ macro ( scrap NG; Land Tax etc etc. ) should have arrived in tandem. It could have been sold as costless back then. The Test Tube mentality precluded that. Now we all live with the failed results of their experiment. It’s time to meet the real world. Depression? Probably. But how deep and how long is all that matters…..

      • Countries like Australia & New Zealand with massive overseas debts and large CAD, do not control their own destinies. We will do what we have to do to be eligible for US Fed dollar swaps .

        The big thing here has been real wages rising at 1% a year for the last 30 years, that is what enables the housing/credit game. When that changes( and the LNP are trying to cut wages ) as in US in the year 2000 then we will be in trouble.

        Ed Harrison at Credit Writedowns has a good post on the futility of QE/negative interest rates but nothing will stop us going to zero, the mathematics of the debt are inexorable.

  2. “This is somewhat surprising” – Bloxham
    Only if you were looking at the wrong indicators. Nominal GDP was a dead giveaway that demand is very weak. The weird thing is the RBA knew that before the December meeting.

    • Yep, and I reckon I’m with pfh (above), house prices are being targeted.

      RBA say “even in his view, it is “not that the cost of money is too high”, which is constraining businesses’ hiring and investment decisions.”

      At such low rates, I believe demand is not curtailed by these rates.

      2/3rds of households do not have a mortgage.

      Unless credit card rates or business rates are reduced significantly, they’re either relying on asset repricing (housing, shares etc) OR 1/3rd of households to lift demand for the whole of Australia.

      • Well they should give 2/3 of the population a decent rate on their savings and let the stimulus flow. Specufesting achieves nothing economically.

      • It’s not just savings. As I’ve said before and migtronix says above, the interest rate minus inflation is the value of work and that is the core of the economy. By pushing the interest rate and therefore, the price of money, too low you are going to lower the value of work, deflate the economy and cause a recession/depression.

  3. “Bloomberg survey suggested that 21 of 27 economists expected a hold, including HSBC” Those banks may want to fire these economists and hire some that can interpret data.

    • I don’t know why they bother employing them. Just follow market expectations instead. And as for the shadow board…

      • They’re paid to confuse the market as their employer desires, allowing the required volatility and price action to occur in the days leading up to the announcement.