Bill Evans affirms May rate cut

Fresh from our Bill:

The minutes of the April monetary policy meeting provide further insights into the current thinking of the Reserve Bank.

The decision not to cut rates at the April meeting despite “financial markets assign[ing] a high probability to a reduction in the cash rate at the current meeting” seem to be explained by a need for more time and more data to “assess whether or not the economy was on the previously forecast path”. It seems that even the “previously forecast path” would be sufficient to justify another rate cut. In that regard it appears to us that the Bank is actually preparing to lower the growth forecasts which printed at the February Statement on Monetary Policy (SoMP).

This decision would be specifically around business investment and exports. In these minutes the Board significantly lowers its expectations for both mining and non-mining investment. On non-mining investment it refers to “forward looking indicators as well as liaison” suggesting that it was likely to remain subdued, AND COULD EVEN DECLINE over the next year or so” (our emphasis). On mining investment it noted that “the recent declines in bulk commodity prices could, at the margin, lead to a larger than expected fall in mining investment and some decline in the production of iron ore and coal” implying a more subdued outlook for exports.

While the minutes do note that consumption and dwelling investment had picked up there was no strong implication of an upgrading in the outlook for the household sector with retail trade in the early months of 2015 being described as “about average”.

There appear to be more specific signs that the Board is increasingly more comfortable with the risks around the housing market: “there had been little change to housing market conditions overall or in the growth of housing credit in early 2015”. In a speech earlier today the Governor pointed out that “popular commentary is, in my opinion too focussed on Sydney prices and pays too little attention to the more disparate trends among the other 80% of Australia”.

Fiscal policy at the state level is also seen to be unhelpful in supporting growth with only NSW and Victoria getting any boost from public demand.

Other explanations for the decision to hold rates steady were around “receiving more data including on inflation”. Clearly next week’s inflation report will be important in that regard with our forecast of 0.1%qtr for headline and 0.5%qtr for underlying representing no hurdle for cutting rates in the face of the expected growth downgrade.

One issue that markets will clearly be pondering is whether the surprisingly strong employment report for March, which printed after this Board meeting, will be sufficient for the Bank to revise its “previously forecast path” for the labour market. We would be surprised if one month was sufficient to achieve that objective while there is no evidence to suggest that the Board has significantly changed its view on the labour market: “labour market conditions were likely to remain subdued”, “the various forward looking indicators were stronger than a year earlier but remained at levels consistent with only modest employment growth in the months ahead”. It is unlikely that one monthly report given the recent volatility in these reports would change that fairly entrenched view.

The Board introduces a new concept in these minutes that is around questioning the effectiveness of monetary policy pointing out that “the responsiveness of borrowers and savers to changes in interest rates and asset prices was unusually uncertain”. This may imply that resistance to ever lower rates is apparent although it appears to say more about what might happen after the May meeting rather than over the next few weeks.

The ongoing plea for a lower AUD is emphasised in these minutes: “further depreciation of the Australian dollar was likely given the recent declines in key commodity prices”. At the time of the April meeting the AUD was trading around USD0.76 and today we see it in the 0.77-0.78 range. This should be a clear signal that jawboning the AUD is unsuccessful if interest rates are not adjusted accordingly. It is clear in these minutes and in the Governor’s speech today that a lower AUD is necessary to achieve the adjustment in the economy that will be required to provide some buffer to the huge fall in Australia’s terms of trade and the sharp decline in mining investment.


From our perspective the key signal from these minutes is an implication that the Bank is preparing to lower its growth forecast in the May Statement on Monetary Policy citing the weaker outlook for non-mining investment and the impact of the recent fall in commodity prices on both mining investment and mining exports. In addition the language around housing market risks appears to be more confident while prospects for the consumer appear to be consistent with earlier forecasts. Arguably the major risk to our rate view is whether the recent strong employment report has motivated the Bank to significantly reassess its recent forecasts for the labour market. This seems unlikely firstly because that would be giving too much weight to one report and secondly it would be inconsistent with the Bank’s approach to link prospects for the labour market with the growth outlook.

We continue to remain confident with our forecast that the Bank will cut rates by 25bps in May but then keep rates on hold for an extended period until it has more evidence around the outlook for 2016.

I am now on board with same, though I still say it’s down to whether or not Capt Glenn gets lucky that day.


  1. Who cares about Sydney? Probably more than 50% bank credit is owned by Melbourne & Sydney household.

    Even RBA is playing with number games. I.e. 80% market the price growth is subdued. Yes, 20% of the market is carrying 50-80% risk………….Captain Glenn.

  2. “We continue to remain confident with our forecast that the Bank will cut rates by 25bps in May but then keep rates on hold for an extended period until it has more evidence around the outlook for 2016”
    ….evidence around the outlook for 2016???

    hahahahahaaahaaaa…. thas fkn funny. gotta consider how manufacturing will bounce back ..gotta consider the next commodities boom… gotta consider the quantum leap in R n D making us the clever country….
    yep 2016 good times in Australia
    Just shoot me.

  3. “In a liquidity trap, the rules of economics change. Things that worked in the past don’t
    work in the present. Central bankers’ economic models, iffy in the best of times, become even less
    reliable. In fact they sometimes suggest actions that are quite destructive…..We are fast reaching the point where markets are crossing the event horizon, where mathematical investment analysis no longer makes sense…..The “textbook models” note that growth appears when rates are low and money is easier to find. Thus, when a central bank lowers its rates, it expects to see higher growth. It also wants to see an increase in jobs, and that is in fact what seems to happen (but does it?)… There is something going on that a simple easy-money policy cannot address….. By encouraging a reach for yield in riskier investments because interest rates are abnormally low, the (Central Banks have) created an environment in which far more risk is being taken than is normal and healthy. It is as if the central bankers and economists have decided that individuals are not smart enough to do what is in their own best interests and think they need to be encouraged to make riskier investments. The problem is that many of those riskier investments are now being made with funds that should in be lower-risk investments meant to sustain people well into their retirement years……The central banks of the major developed economies have once again dangerously distorted the real economy…..The total amount of global debt has risen by 33% in just the last seven years, that is, by a staggering $57 trillion. …. I fear that we are once again facing a Minsky Moment, when our accumulated debt and the continued distortion of the economy by central banks will create another financial crisis. Is it 2005 all over again, so that we can expect another few years before the piper must be paid? Or is it mid-2007, so that we need to be preparing for another global crisis? In both cases the markets were telling us things were okay, but in 2007 we were beginning to notice signs of increased volatility, and growth seem to be weakening. What do you see when you look around?
    Does it feel like 2005, or 2007? ”
    (John Maudlin 20/4/15)

    • Thanks for posting that Janet.

      In my industry, I look around me and see a lot of capitulation. More and more people throwing their hands in the air and saying “that’s just the market we’re in” and “we don’t set the market”. From memory, that sounds more like 2007 than 2005 to me.

  4. Could it be that Central Bankers are trashing paper currency of any type and they are all losing their value,not assets appreciating?

  5. bernard collins

    Jim Rogers has been saying printing money around the world will end in disaster and that the world has never seen such debt since the GFC..
    America is the biggest debtor nation in the history of the world Rogers claims.
    The next crisis will end in tears because governments wont have money to throw at the problem next time.

    • What is the economic survivalists strategy here? Bury gold in the backyard? Basket of metals? Or should I just spend my money on skills training (baker, butcher, carpenter) so that I’m valuable in the post-financial-apocalypse world?

  6. More juice for the Sydney and Melbourne housing markets; more pain for everyone else as the misallocation of money increases.

  7. Jumping jack flash

    Oooh a rate cut! I suppose they have to create more debt demand somehow in an environment of stagnant incomes and employment uncertainties.

    Once debt momentum stops, so do house prices. There is nothing else, unless they open the foreign investor gate a bit more.