Bill Evans on RBA hold

From Westpac’s Bill Evans:

The Reserve Bank Board decided to hold rates steady at 2.25% at their April meeting. There were no significant changes in the wording of the Governor’s statement from the statement released following the March meeting. The key terminology around the policy outlook remained the same: “It was appropriate to hold interest rates steady for the time being”; “further easing of policy may be appropriate over the period ahead”.

Sentiment around the Australian dollar was unchanged: “a lower exchange rate is likely to be needed to achieve balanced growth in the economy”. The degree of concern around the AUD is emphasised by the Bank actually providing a ‘forecast’ for the currency by noting that “further depreciation seems likely”. That is a different approach to previous statements when it has been described as “above most estimates of its fundamental value”.

General commentary around the economy continued to refer to its operating “with a degree of spare capacity” and growing at a “below trend pace with overall demand growth quite weak”.

Since the Board meeting in March the price of Australia’s major export commodity, iron ore, has fallen by around 30%. The Bank noted that prices for our key exports have been falling and implied that it will be necessary to further revise down forecasts for the terms of trade. This is particularly significant because it will affect the fiscal outlook and further constrain nominal income growth in 2015.


Since the March meeting we argued that another rate cut could be expected in the April/May window. Last week we opted for April given the deteriorating outlook for our terms of trade and the likely effect that lower rates would have on demand and the Australian dollar. Of course, the concern with that call was the Bank’s propensity to prefer moving in the months which coincide with the Statement on Monetary Policy(SOMP). Those months are February, May, August and November. It appears that this policy approach has been taken again.

Recall that at the time of the February SOMP the Bank assumed a second rate cut when formulating its growth forecasts. Developments in the economy since then are unlikely to have dissuaded them that another cut is appropriate. That is certainly consistent with the ongoing choice of language: “appropriate … for the time being”. Readers will recall that following the recent introduction of that term in the March statement we observed that on the eight occasions that it was used since the beginning of 2009, there has always been a follow up move within two months.

Accordingly we expect that the Bank will choose to cut by 25bps at the next meeting on May 5 and then hold rates steady for some time until it can assess whether its current growth forecast for 2016 of 3.5% is achievable.


  1. Glad to see that nobody has bothered to waste their time thus far commenting on rubbish like this from another obsolete Australian overpaid economist…’ve made a good living Bill so go retire to one of your holiday homes and let the MB young ones take over the show.

  2. “The erosion of capital is vicious because it is well hidden and may become obvious only when it is already too late to do anything about it.The process of destruction of capital is a direct consequence of the falling interest rate structure.
    Those who argue that low interest rates are salutary to business, confuse a low but stable interest rate structure with a falling one..The latter, to be sure, is lethal to business.
    —Professor Antal Fekete

  3. Printing a lot of extra money to push interest rates down to zero causes inflation in the bond market, the stock market and the housing market.
    But it eventually causes deflation.
    That’s what happened during the 1930s…and that’s what is happening now.
    It is way too late to do anything about it…mathematically it is not possible to repay the debt.
    Everyone will just have to do the best they can to protect themselves and their families for the very long road ahead.
    Greece is next.

    • There is now so much debt produced through gradually lowering interest rates over the last 34 years that there will never be a good time to increase them without consequent destruction.
      So the central banks will continually lower interest rates….to zero…..then to negative interest rates as in parts of Europe.
      The saver, being disenfranchised, is forced into spending less…then less, living more frugally…hollowed out until forced to spend all capital and into the arms of the Old Age Pension.This will occur just after the housing bubble pops, reverting to the mean(down 50%), which will happen just before the Assets Test is increased to include the family home… brilliant timing as usual.
      At this time Bill Evans will call for more interest rate cuts… the RBA must cut another 0.25% to minus 1.75%.
      When the penny eventually drops and people finally realise what caused two Great Depressions within 100 years…. we will never have central banking again.

  4. Mohamed El-Erian Explains Why He Is Now “Mostly In Cash” | Zero Hedge

    “I am mostly concentrated in cash… because I think most asset prices have been pushed by central banks to very elevated levels. Central banks look at growth, at employment, at wages. They are too low. They don’t have the instruments they need, but they feel obliged to do something; so they artificially lift asset prices… Because they hope that they will trigger what’s called the wealth effect, but there is a massive gap right now between asset prices and fundamentals.” … read more via hyperlink above …

  5. Ben Bernanke blogs on limits of monetary policy:

    Let there be no mistake: In light of our recent experience, threats to financial stability must be taken extremely seriously. However, as a means of addressing those threats, monetary policy is far from ideal. First, it is a blunt tool. Because monetary policy has a broad impact on the economy and financial markets, attempts to use it to “pop” an asset price bubble, for example, would likely have many unintended side effects. Second, monetary policy can only do so much…

    Effective financial oversight is not perfect by any means, but it is probably the best tool we have for maintaining a stable financial system. In their efforts to promote financial stability, central banks should focus their efforts on improving their supervisory, regulatory, and macroprudential.