Kouk: RBA to slash rates, Australian dollar to crash

Via the Kouk today, given he and MB are the only ones to have gotten this right:

In the wake of the September quarter national accounts, and with accumulating information on house prices, dwelling investment, the global economy and spare capacity in the labour market, I have revised my outlook for official interest rates.

For some time, I have been expecting the RBA to cut the official cash rate to 1.0 per cent, a forecast that has been wrong (clearly) given its decision to leave rates steady right through 2018.

That said, it has been a highly profitable call with the market pricing interest rate hikes when the call was made which has yielded a decent return as time has passed.

My updated profile for RBA rates is:

May 2019 – 25bp cut to 1.25%
August 2019 – 25bp cut to 1.00%
November 2019 – 25bp cut to 0.75%

The risk is for rates to 0.5% in very late 2019 or in 2020

It will be driven by:

  • Underlying inflation remaining below 2%
  • GDP growth around 0.25 to 0.5% per quarter in 2019
  • Annual wages growth stuck at 2.5% or less
  • Global growth slowing towards 3%
  • Labour market under-utilisation around 13 to 13.5%

There are likely to be other influences, but these are the main ones.

AUD, as a result, looks set to drop to 0.6000 – 0.6500 range.

Can’t argue with that. Question is, what will it achieve? Banks will keep half to themselves as funding costs keep rising in short term:

And long:

Two mortgage rate cuts left to prevent the crash.

Good luck with that.

Comments

  1. Sorry nothing to do with the above.
    Spent a fair bit of time watching the House of Reps yesterday.
    The Morrison Government is terrible.
    Yes they won all the Divisions I saw, but the Policy, omg.
    They are trying to rush through Legislation to lower power prices, “The Big Stick”.
    They want Divestment Laws, so they can make a power company sell off assets if they are charging too much.
    The Government threw the bill on the table , about 150 pages and expected everyone to vote yes straight away, so they can get it to the Senate and then in Law before the next election.
    No party room meeting or such, for the Wednesday version of the bill.
    Because they have cut the sitting days to so little for early 2019, they got to try and push it through now.
    I don’t know yet if they got it through the House of Reps last night or not.
    No wonder Malcolms giving them a serve.
    We as a country are in so much trouble with the current no hopers in power.

      • MediocritasMEMBER

        If the USA is anything to go by, one of the primary outcomes of cutting rates is to push corporations to issue corporate bonds and use the proceeds to buy back their own shares, leading to a stock-market rally (accentuated by front-running, momentum chasing, short stop-loss hunting robots), and allowing executives to cash in on stock market based “performance” bonuses.

        Corporations will not take advantage of lower rates and use debt to expand operations because, like in the USA, they know that the consumer is dead in the water. It’s all just financial shenanegans, expanding the amount of money sloshing around without it matching any expansion of the real economy. Inflation is largely contained within the FIRE sector because there’s no channel to deliver the new money into the hands of the middle class (it isn’t being earned as wages).

        Dimitry Orlov expresses it well :

        After the financial collapse of 2008 it quickly became obvious that nobody competent or responsible was in charge. The “solution” was for central banks to start blowing financial bubbles by zeroing out interest rates and flooding the world with new debt. Debt that expands much faster than the economy is garbage debt, and it gave rise to various other kinds of garbage: garbage energy from shale and tar sands, garbage money in the form of cryptocurrencies, garbage real estate investment schemes, garbage corporate balance sheets bloated with debt used up in stock buybacks, a large crop of garbage oligarchs gorging themselves on all of this garbage “wealth” and much else. Things look good while all this garbage is packaged up in financial bubbles, but once they pop (and as all children know all bubbles pop eventually) everyone will end up wearing the garbage.

    • Arrow2,

      “..Question is will cutting rates actually increase home lending? ..”

      Yes even if the banks continue to impose a credit crunch…..which they will not once the RC recedes in the rear view mirror.

      Low rate mean lower repayments which means loans are more affordable.

      With plenty of population ponzi and demand for commodities to hold up the AUD.

      The bubble will soften …say 10-20% (if we are lucky) but will not pop.

      • Its all relative. If my IO loan converts to P&I and then they lower the rates by 0.5% … it is still going to hurt.

      • Pfh007 – every rate cut has reinflatdd the bubble in the past. But isn’t the size of a new home loan now (in theory) mostly calculated based on the income and expenses of the buyer? This rate cut will cut monthly expenses but not by much. The overall loan size should remain well down from pre-RC levels. Or not?

      • Arrow2,

        “..The overall loan size should remain well down from pre-RC levels. Or not?..”

        Maybe.

        There is nothing stopping the banks from loosening lending again.

        Nor anything stopping the government from subsidising home loans just enough to keep demand up.

        Assuming of course they need to. They may just make it easier for foreigners to obtain residency provided they buy property.

      • There is no way to have a soft landing following a bubble. It has never happened and never will happen. Because prices were only supported by expectation of CG. Once that changes prices collapse. Volume of lending is irrelevant.

      • Even StevenMEMBER

        Agree with Sweeper. Likelihood of negotiating a soft landing from the lofty altitudes we have been travelling at = slim.

      • Sweeper,

        “..Because prices were only supported by expectation of CG. ..”

        And havent those expectations proven to be incredibly persistent.

        Got any links to our bankers or politicians announcing that capital gains on residential housing are a thing of the past?

        Nominal capital gains are not difficult to acheive if that is your central objective.

        And given the current structure of our monetary system that objective must remain central.

        If you want to change the central objective you need to reform how the monetary system operates to make it less dependent on residential housing lending.

      • Brenton,

        “007, it doesn’t matter what vested interests people have mate. Debt is all powerful.”

        If debt is all powerful how are of those profiting from the creation of those debts not vested interests?

        Or are you arguing that those responsible for creating the debts (which are their assets) are not going to try and protect them using whatever means are available.

        You lack imagination if you think they are about to give up.

        While they can foreclose and seize the security for their debts (assets) they know that only works while equity is positive.

        These parasites on the public are not amateurs.

        They have the very best advisors working for them at top dollar to protect their interests.

        Whatever a bust might do it will do to them least.

      • You are missing the point about expectations and asset price bubbles 007.
        Market prices were only supported by unrealistic expectation of CG (specifically: expectation of CG not supported by a realistic forecast of cash flow). Once the expectations become more realistic the asset price has to drop until prices reflect realistic expectations.
        You are trying to explain a bubble with fundamentals eg. availability and demand for credit. Which is why you are getting the wrong answer.

      • I’m arguing that once debt has reached a certain threshold it is a power unto itself.

        The vested interests issue the credit (debt) until the populace can no longer handle it. It’s as simple as that.

        The speculative element that Sweeper is referring to is what drives it well beyond that threshold.

      • Sweeper,

        As usual you are not listening just projecting.

        I don’t have a problem with your comment

        “…Market prices were only supported by unrealistic expectation of CG..”

        I have a problem with

        “..Once the expectations become more realistic..”

        What is the basis for your claim that expectations will become more ‘realistic’ when they have been unrealistic for years and years and years.

        If they were realistic prices would be adjusting much further and much faster than they are. In many housing markets mostly what we are seeing are investors hanging out a shingle looking for a decent bite. Nothing approximating the kind of capitulation that would reflect ‘realistic’ expectations.

        There are plenty of ways of keeping expectations of capital gains ‘unrealistic’ that have nothing to do with “cashflow” which I might add is something you slipped in and I never mentioned. It is quite reasonable for much of the public to expect continuing capital gains when not a word is said publicly by policy makers to suggest that the capital gains to date were ‘unrealistic’.

        Still waiting for your abundant links to policy makers, politicians and vested interests working hard to bring some realism to expectations.

        Even the ALP who promise to introduce policies that should make expectations more realistic are denying that is the case.

        They simply seek to make housing more ‘affordable’ – not a peep (except the occasional loose word which is later denied) about dashing unrealistic expectations of capital gains.

      • Brenton,

        “..The vested interests issue the credit (debt) until the populace can no longer handle it. It’s as simple as that…”

        Can no longer handle it?

        They were handling it quite happily until the banks decided to restrict loan sizes (which they could choose to increase again).

        No doubt if there were (or there are) further cuts to interest rates, lengthening of loan terms or the allowance of mortgage interest as a tax deduction the populace would have handled (or will handle) that too.

      • Because the prices get so high and yields so low that it becomes an inordinate risk. Smart money leaves prices don’t increase as fast as expected people delay purchases and it becomes self reinforcing. Prices fall so everyone revisits expectations. Eventually prices fall until yields are at a level where institutional investors will buy. In small open economies this is usually benchmarked against rental yields in larger markets. Eg prices would need to fall until yields are at around 8-9% for institutions to support the market. But rents fall as well when bubbles burst. Which means prices need to fall even further to find support.

      • The credit growth just follows the speculative mania because debtors have more to pledge during the mania. Then when expectations change it goes in reverse.

      • You’re killing me with this shiz, 007. The reality is that Australia has the 2nd most indebted households on the planet, and they did it, by not only taking interest rates to historic lows 2 years ago, but through sub-prime style lending practices. Interest Only, Liar Loans, Equity Maaaate! was never meant to be sustainable lending, it is literally the upper extremes of what occurs during a long term debt cycle.

        Rather than having some awestruck mentality when it comes to these people, first acknowledge that there are 2 cycles underpinning our economy: the short and longterm debt cycle. Then go and read up on the history of these cycles and apply it accordingly.

      • Brenton,

        “..You’re killing me with this shiz, 007…”

        Well I have listened to the likes of you spouting off for the last 20 years about how impossible it is to get into the situation we are in and how it is all going to fall apart tomorrow.

        You talk about debt but it is quite clear you don’t know even know what it is.

        If you did you would have been right 20 years ago.

        If you did you would appreciate that an AUD sitting above 70 cents is mocking your theories.

        “..Interest Only, Liar Loans, Equity Maaaate! ..”

        Who cares? A loan is only a problem if it defaults.

        The crazy part about your theory is that it depends on the very kind of ‘austerity’ medicine that you would normally howl about.

        That is the point of the GFC. The owners of the loans realised that whatever loony economic ideology they may pray to they are never going to blow up their assets, practicing what they preach, voluntarily again.

        Watch the AUD as that is the best indicator of when the bubble blowing ammunition has run out.

      • It’s lasted 20 years because people like you have endlessly justified the bubble by pointing to fundamentals like credit availability.

      • Sweeper,

        “It’s lasted 20 years because people like you have endlessly justified the bubble by pointing to fundamentals like credit availability.”

        People like me?

        Justifying the bubble?

        LOLOLOLOL.

        All I have said is that it has lasted this long because it is central to the privatisation model of public money and if you have the public underwriting it the AUD is effectively the only limit on a CAD countries ability to blow large bubbles in nominal assets prices .

        You know the privatisation model of public money you keep make apologies for when you are not claiming to want to nationalise it.

        What is your position today? Last week you were back peddling from your bold nationalise the private banks agenda with a raft of caveats and carve outs. Apparently you now only want to nationalise the bad apples.

        Just in case anyone is interested in what I have been arguing for rather than the fantasy version that Sweeper likes to swing at.

        https://theglass-pyramid.com/2018/11/03/fixing-oz-banks-pt-7-what-should-be-the-role-of-the-rba/

      • What does 20 years ago have to do with now? Or whatever these phantoms had to say back then? Interest rates have never been 1.5% before…. Household debt to GDP has never been 125% before. Household debt to income has never been 190% before.

        Maybe do a little less spruiking of the bankers line and a little more independent thinking. Anyway, that’s just my humble opinion.

      • Well household debt to gdp had never been 110% either and interest rates had never been 2% so whats your point.
        In a few years you’ll probably be saying d2gdp has never been 150% and interest rates 0.5%

      • The problem I have with your line at present, 007, is you’re relying on the theory of extrapolation. As though it is guaranteed that intervention will succeed this time too, simply because they’ve done it in the past (irrespective of changing fundamentals)… it’s what property specufestors do. Prices have always gone up, so will continue to do so.

        I don’t need to be right or wrong, I just need to watch the data, be cognizant of changing macro and invest accordingly.

        You on the other hand would have some young sod knocking on negative equity’s door, hoping you’ve been right all these months (even as you were wrong) and that he/she hasn’t just bought in at the top of a life ruining property bubble. You tell me who is the more responsible and well reasoned voice amongst us two.

      • See above, bjw. You’re another one that’s pretending prices haven’t already fallen 10%, whilst chasing it the whole way down with the same interventionist rhetoric. Hate to break it to you, whether they succeed or not, current conditions sing loud and clear.

      • If I had’ve listened to you 007 I would have bought bitcoin for Christmas last year. Is that one paying off?

      • @Benton
        you might want to consider the hypocrisy of complaining about people extrapolating long trends and then using a small correction to extrapolate into the biggest crash in house prices ever.

      • Nice attempt, but I clearly articulate my narrative above, which is built around the long and rich history of the world’s many, many debt bubbles. What’s your narrative built on? Extrapolation and blind faith in some oddly accented banksters 😉

        When I talk about current price falls, it’s merely a common sense approach to the reality of a depreciating market. Common sense is an oft neglected trait though.

      • Sweeper,

        “..If I had’ve listened to you 007 I would have bought bitcoin for Christmas last year. Is that one paying off?..”

        More porkies Sweeper?

        I have never recommended that anyone buy cyber currencies nor have I ever bought them.

        My observations about bitcoin were limited to criticizing the hypocrisy of bank apologists like you defending a state guarantee of private money when it comes to private bankers but then running around in hysterics when other private individuals try to invent and introduce new forms of private money.

        It is a bit sad to hear old school tankies like you defending a private/state money cartel with such enthusiasm.

      • Doesn’t seem like you are factoring in the human elements Pfh. An economy isn’t a thing onto itself that drives human behaviour, it is just a trade facilitator that entwines itself with human society.

        The population Ponzi is dependant on people accepting it and there is already a massive push back against immigration across all of the West, including here. You can only decrease the average person’s standard of living relative to the elite standard of living by so much before populism and eventually revolution takes over. The bread and circus distractions, like Western identity politics, only work so long before people ignore them entirely.

        If we are lucky, we will vote in a leader that turns off the immigration tap. If we are unlucky, our leaders will keep trying to distract us and the populace will take matters into their own hands. Either way, the economy your reason relies on will be undermined, or, as you say – ‘If you want to change the central objective you need to reform how the monetary system operates to make it less dependent on residential housing lending.’ – accept that it won’t be anything about what people want, it will be required.

        The end result of all of this is already laid out. One or 2 of the big 4 will fail. Our government will either try to bail out, as per the US in 2008 and kick the can, or it will cut to the chase and socialise the failing banks. It will also have to buy housing assets to house the masses, otherwise there will be blood on the streets – via 500 strong gangs of homeless roaming our city streets.

      • PF gets past one but blocked by sweeper, Brenton takes the ball cant get passed PF, its now two on one, who will win, so much more to come

      • You were on Migs team in the bitcoin kerkuffle. I clearly remember you saying bitcoin promotes freedom (… to lose a s/t of money). Just because it’s collapsed doesn’t mean you get to rewrite history 007.

      • Well spotted unmester. 007 often doesn’t factor in Human beings as we are all slaves to the monetary (meaning banking) system which is imposed on us like another law of physics.

      • @Brenton.
        So using your common sense can you please explain what part of your narrative was different in 2013 and why we didn’t crash then. What is so particular about this point in time that this is the big one. Other than your wet dreams about it? Why not in another 5 years time, or 10?

      • With the exception of Sweeper, who is just bitter and twisted and needs to invent my views so they are a bit easier to handle, I recommend re-reading what I write a few times with some attention to detail.

        I have no problem with the idea of a housing bubble in a CAD country like Australia popping because as I have said a billion times over the last eon it depends on capital inflows from foreigners.

        That is why I say watch the AUD because that is the hard credit rating of all aspirational banana republics.

        While it stays well above 50 cents a housing bubble burst is going to be either an accident or incompetence.

        Naturally both are very possible but much less likely as a result of the lessons learned in the GFC.

        Strapping the full faith and credit of the public to the bubble is not even questioned.

        There are more lines of public credit and accommodation than you can poke a stick at.

        Its all about the AUD.

        If that collapses I will be first in the Bear Hot Tub.

        You can quote me on that Sweeper.

      • 007 you still haven’t explained why people are going to buy houses at prices where they are no longer expecting CG’s to offset losses while they carry the asset and in many cases are expecting capital losses.
        And no it isn’t easy to change expectations. Changing expectations not only means fixing the price of houses for this year it means fixing them for the next 30 or more years. The state can barely control interest rates on its own bonds for durations longer than 60 days, yet according to you it’s a walk in the park to fix the price of housing for 30+ years.

      • Sweeper,

        “..And no it isn’t easy to change expectations…”

        What like the great Australian expectation that house prices never go backwards?

        I think it is awesome that your expectations are of house prices falling off a cliff.

        In this regard your optimism gives me comfort.

        Would you please spread that infection as far and as wide as you can and as quickly as possible.

        Hopefully you have a strain that takes hold as at the moment it seems to only really thrive in the MB petri dish.

        Valuations in 2013 were extreme enough for your theory of rational expectations to have dashed them on the rocks.

    • Cutting rates will only improve bank NIMs which will be under pressure from increasing allocations to loss reserves.
      I agree with the Kouk that the RBA will be cutting next year. I just don’t think the punters will see a single bps of it.
      The need to cut will be driven by a rapid decrease in apartment prices (lead) followed by an acceleration in house price falls (being sucked along/down) driven by the unanticipated knock on effects of settlement failures which will be all over the headlines in Q2 and Q3 2019.

    • Notice that Kouk does not explain the real reason for cuts.

      “…The risk is for rates to 0.5% in very late 2019 or in 2020

      It will be driven by:.

      It will be driven by:

      Underlying inflation remaining below 2%
      GDP growth around 0.25 to 0.5% per quarter in 2019
      Annual wages growth stuck at 2.5% or less
      Global growth slowing towards 3%
      Labour market under-utilisation around 13 to 13.5%..”

      It will be driven by ONE thing.

      The desire to pump more credit via the home mortgage new money distribution channel.

      • We like every other major economy are reliant on credit creation. I don’t see how this is different from any other economy.
        I think interest rates should be lowered given the recent stats. If we could enforce that people can’t reduce their repayments (APRA/ASIC), that mortgage eligibility is tested still at the higher rates (i.e. restrict credit as if the rates were higher) it could be a strategy to get our debt slowly paid off. Of course the RBA will probably buy mortgage securities in order to facilitate this as foreign money flees the country under the move but replacing foreign capital with local capital isn’t a bad thing at all even if it is printed. Give people the means to work off their current debt; but stop the problem getting worse.

      • Even StevenMEMBER

        @ AK

        I agree other economies also rely on credit creation – there’s no other model (AFAIK) in developed countries. Which is why I think Pfh007 will be an old, old man before he gets his wish of sweeping reform. And it certainly won’t stem from Australia. Us? Trailblazers? I think not.

        But, I do think that the credit pump has been allowed to run much more strongly here – raising house prices to nose bleed levels – than it has in other countries. We apparently don’t mind throwing our young to the wolves. Well done Australia.

      • Even Steven,

        “..Which is why I think Pfh007 will be an old, old man before he gets his wish of sweeping reform…”

        I kind of hope that proves to be the case.

        Arguing for the reforms I propose at my age is not in my interest. Reform is a young person’s game. Which is why most boomers and Gen-X are not interested.

        Better we keep blowing bubbles until the worms feast on my bones.

    • The Traveling Wilbur

      Futureboom in what? The economy? House prices? Wages? Retirees returning to work? Morrgagee sales? Cost of living? Workforce casualisation? Pillow sales?

  2. Two more hits to the housing price floor that could be big in a year or two.

    The end of Bank of mum and dad, with some class action against banks.
    And
    LMI disappearing because it’s pure fraud. Lots of legal action here too.

      • The Traveling Wilbur

        Because when lending institutions start self insuring their loans instead of outsourcing that risk, and still charge the same risk premium, it demonstrates what an obvious con to get money out of Jo Public for nothing that LMI has always been.

        Would be my guess.

      • It’s a rort, which is essentially a fraudulent practice. LMI has been a huge contributor to market pricing distortions. Lenders usually price risk into the interest rate (or their NIM, same thing effectively). Higher risk means higher rates means lower borrowing means less market price distortion. LMI has enabled the banks to offset the risk of default from high LVRs, where borrowers (typically younger and trying to borrow as much as possible for the first home) pay for the bank’s call on its asset at the full value. This then feeds up the chain, as first home buyers can afford to borrow more as the interest rate stays lower, which gives second time buyers more money etc.

        In a rising market no-one cares. It’s a “grit your teeth” tax that the high LVR borrowers pay to get into the market. In a falling market, particularly when negative equity occurs and the property is sold, LMI is paid out to the lender and then the LM Insurer goes after the borrower for the difference (a fact that most people who have paid for the bank’s LMI don’t realise). Bankruptcies galore, a feeding frenzy for the press which then becomes a death spiral for the housing market until everything washes through. And probably a major corporate collapse because the LMI providers are so thinly capitalised that they simply won’t be able to cover the losses (HnH has gone after Genworth in the past. Not hard enough in my opinion, but he knows its a company built on hot air).

        You would not believe the number of people that think LMI protects them if they lose their job i.e. a pseudo income protection scheme. That is because although every broker and mortgage seller in the country knows what LMI really is, a very large percentage of them don’t ensure their clients know what it is.

        We will probably muddle through this decline like we muddle through most self-created dramas. The problems occur at the periphery, and most people will simply batten down the hatches. The idea that a crashed housing market will bring more affordable property to people who can’t afford to buy at the moment is a pipe dream. You won’t be able to borrow a smaller amount because the banks will only lend to those with rock-solid incomes or very large deposits. If you’ve got a decent deposit now you are sitting pretty, and can wait for the pick. If you haven’t, start or keep saving as you will need it. You can also expect to see mortgage rates disconnect from the cash rate as term deposit holders chase yield and overseas borrowing costs increase due to the higher risk. Cash rates might drop but mortgage rates won;t drop by as much, if at all, as the banks need to retain their NIM and access to funding becomes challenging.

      • Even StevenMEMBER

        Thanks for the comments folks. Interesting and some perspectives I haven’t seen before.

      • I will add to the above great explanations.

        The very purpose of LMI is fraudulent in that it targets borrowers who cannot accrue 20% or more deposit and implies the risk is relocated for these loans should they default, these are clearly most risky but there is no money to cover any substantial defaults so there is fraud because banks know this and just use this fraud to make sub prime liar loans. Its also going to be another legal battleground I believe as many borrowers and likely bank of Mum and Dad too thought the insurance covered them from defaulting, this could be the biggest hit to banks as it is a classic fraud on the ignorant. Fiduciary duty will be tattooed on all bankers foreheads for generations after this gets thrashed out.

  3. Classic debt cycle.

    Interest rates approached zero -> credit tightening -> bubble (cycle) collapses

    Going to mystically stop at 20%? Bloody hell lol

    As Flawse says, the answers lie back in time.

    • LVO has mentioned a few times that the 40% of mortgage debt that comes from offshore is denominated in AUD. That means it ultimately can be replaced by QE.

      IMO the question that needs answering is how low will the RBA allow the AUD to fall?

      • QE is an ongoing process, one that doesn’t prevent deleveraging from taking hold. People will still need to bring their debts down, which is tantamount to a period of asset declines and recession.

      • Jumping jack flash

        I don’t see how QE would assist anything at the moment. Our banks are still ok. As far as I’m aware QE is to assist the banks.

        The only reason I can think of why they would want to cut rates now is to kick up CPI inflation which is pathetically low, and then hope that magically translates into trickle down.

        It wont.

        They need to accept the fact that debt has gummed up the system and trickle down has effectively been reversed and replaced by wage theft. I.e, trickle UP. Trickle down is tenuous at best, but there’s no way it will return until most of everyone’s debt is repaid and the gouging and theft stops.

      • jjf, there has been an assumption that the money owed offshore would cause an 1890s like spike in mortgage rates when the money is withdrawn. The counter argument is that money is all denominated in AUD and RBA could step in to fill the void.

        Brenton, I am personally terrified of an inflation scenario. You saw during GFC Krudd jumping aboard the helicopter and throwing money away. There are many other tricks to be played that tantamount to legislated inflation. FHOG, helicopter money, partial debt jubilees.

        I am hoping the answer lies within superannuation. As Adam Creighton mentioned, it is a tax rort for the rich that costs more than pension for all. Scrap it. You have 9.5% that can be used as a pay rise and tax increase, existing super savings used to pay down debt on PPOR only.

      • “IMO the question that needs answering is how low will the RBA allow the AUD to fall?”

        Agree – good question.
        They obviously do NOT want the A$ to fall – – BUT — hopefully market forces will win.

  4. The first step they need to accomplish is to bring the 6-month BBSW down. It’s trading effectively with about 1-2 rate hikes priced. They can do this without being seen to be doing an about-face – which matters in front of an election – and they can probably do this without seeking support from the Monetary Board. So, they need to inject liquidity into the interbank market. A LOT of liquidity… bring 6-month BBSW down to say 1.75% from 2.12%. That would ease pressure on banks…

      • Yes they could. But there are challenges to doing that right now. Firstly, the RBA Monetary Board won’t meet for two months – by then the economy could be really floundering. Second, it would require a substantial Volte-face. I have yet to meet a politician or CB Governor with the courage to do that. Thirdly, cutting rates in front of an election would be political poison for the Liberal coalition and they’re going to make selling a rate cut in Canberra unpalatable (essentially Lowe backed himself into a corner). And finally, the real issue here isn’t the level of the OCR, its the level of the BBSW fixing rate.

        The OIS-BBSW spread has blown out to around 65bp. Essentially, the banking system is gasping for oxogen and the RBA’s got its foot on the banking system’s throat. This never ends well…

        Rate cuts may help bring down the AUD, but the banks may simply absorb them leaving the financial system still gasping for liquidity. Large-scale OMO’s are the ticket.

      • competitive in terms of China will buy same amount of dirt with less USD. Since we manufacture nothing..

        Ignore me pls.. multitasking..

  5. Oh, BTW MB – you and Kouk weren’t the only ones talking this story. I’ve been talking it all year too… and most of my investor clients in Melbourne and Sydney have been very much onboard with this view since mid-year.

  6. Jumping jack flash

    Good luck with that indeed!

    What it will achieve is inflation. The wrong kind of inflation of course, but inflation nonetheless. They want inflation, but they want good inflation.
    Can they pass this bad inflation off as good inflation to the banks’ banks to keep them from raising our banks’ interest rates?
    It may allow them to report a high CPI, and then hide the fact that wages haven’t grown at all. They’re good at that.

    This, IMO is the fundamental risk to their desired goal of a 30-year slow melt – the “soft landing”.

    This risk and uncertainty should never have happened in the first place, if the actual risk of lending out insane amounts of debt to anyone who wanted it was priced in accurately, ie, at normal interest rates – 10% to 15%.

    Can’t necessarily blame the RBA, the world was complicit. The world wanted cheap debt. However, once again, it shows that our hugely intelligent fearless leaders with giant brains were asleep at the helm while all this was going on.

    If nothing else, what should be taken away from this is “debt is bad, mmmkay?”
    Slowly, they are catching on.

      • Wage inflation is good inflation (in the context of paying off huge amounts of debt)

        Except that it’s anathema to neoliberal ideals. It’s a wonder we got away with it in the 90s after the last recession.

      • Jumping jack flash

        Haha Peachy.

        I think that horse has bolted. The name of the new horse is to stabilise the falls somehow. Banks restrict debt and vested interests put the kibosh onto everyone so nobody dares to sell and meet the new market price.

        eg: “have you considered the joys of renovation? A lick of paint doubles the price, as the saying goes”. Or, “Don’t sell now, the market will resume after 3 to 5 years. You’d be mad to sell”. And, “You, want house!? No debt for you!”

        Same strategy as in the US. They did generally ok with it.

      • @JJF is correct…any and all actions taken will be an attempt at triage, and not curative in purpose.

  7. Heh. Rates will be cut to the bone, then the peso plummets.

    Notice what happens when emerging markets have a currency that drops like a stone – interest rates to the moon. Australia is descending into the status on an EM so beyond the pan is the fire.

      • The middle class with a mortgage will be destroyed. But so will the lower class and even the upper class of they all have large amounts of debt.

        Given the stats on which percentile holds the most negatively geared property (it’s not the middle), ‘Straya might be about to invent a new kind of recession where the “upper” class get smashed the worst

      • Jumping jack flash

        +1 CM

        Unfortunately the “upper class” will continue to gouge living costs, and steal wages from the plebs to repay their debt. As usual it is the workers who will get smashed.

        Workers with enormous debt will be hit the hardest, as you say.

    • As citizens we have rights, Democratic rights that have been trashed or sold off, but we also have legal rights and protection. The RC is an example of the two sets of rights that should have been in harmony we’re completely out of balance.

      The law pricked this bubble and the law is far from finished with the FIRE sector, in fact it’s just the begining.

      It’s going to be awesome.

    • Goverment could just borrow money and give it to people as a once-off payment again saying it is a tax break. When they can’t borrow from financial markets anymore just borrow from the RBA. Allow superannuation to be used for the main house – that’s something that a lot of people would take up especially if they are “young high income professionals” who bought expensive houses with decent superannuation balances. The problem with the above strategy is that it creates deflation – instead of the money being invested it is used to pay off debt. The superannuation industry would be crushed by such a move.

      I still think its more likely they will push interest rates down; lower investor interest rates (which have a lot of scope to move down vs owner occupied ones), etc via relaxing some restrictions + buying mortgage securities. This will make the yield proposition better off for property and potentially limit the falls.

Leave a reply

You must be logged in to post a comment. Log in now