Bill Evans: RBA will be unmoved by sinking data

Via WBC’s Bill Evans:

After the usual summer recess the Reserve Bank will conduct its Board meeting on February 5, followed by a speech from Governor Lowe on February 6 and the February Statement on Monetary Policy which will print on February 8.

Of course there will be no rate change following the Board meeting but there will be considerable interest in the Governor’s Statement and the subsequent communications.

Recall that the minutes of board meetings have usually contained words along the lines of “members continued to agree that the next move in the cash rate was more likely to be an increase rather than a decrease.” Alternatively the November Statement on Monetary Policy noted “further reducing unemployment and ensuring inflation is consistent with the target. If that progress is made higher interest rates are likely to be appropriate at some point.”

But those sentiments were expressed when markets had been anticipating rate hikes. At the beginning of 2018 when Westpac was predicting the cash rate would remain on hold in both 2018 and 2019, markets had priced-in a full 25bps rate hike by end 2018. Today, markets are assessing that the next move in the cash rate will be down by 25 basis points with a probability of 60% (15bps) by year’s end.

In defence of the economists, only 11 of the 20 forecasters (Bloomberg Survey, January 12, 2018) predicted a hike or hikes in 2018 but this group did include the other three major banks, AMP, and most major investment banks. There is no survey evidence to check how many of the “no-change nine” supported the Westpac view that rates would remain on hold through 2019 as well. Since that survey in January last year Westpac has extended its “on hold view” through 2020. Turning to today, there is also, at this stage, little support from the economists for the “market view” which is pricing rates to be cut by end 2019.

The key as to whether the Reserve Bank will placate markets and adopt a pure neutral bias by eliminating the “next move up” in its commentary will hinge on how it reassesses its forecasts which will be released with the February Statement on Monetary Policy (SOMP) on February 8.

Recall that, based on its forecasts in the November SOMP, the conclusion that the cash rate would eventually rise was reasonable.

Growth was forecast at 3.5% in 2018; 3.25% in 2019; and 3% in 2020. Trend growth is assessed by the RBA as 2.75% (1 ppt for productivity growth and 1.75 ppts for labour force growth).

Three consecutive years of comfortably above trend growth could be expected to erode significant excess capacity and boost employment growth so that inflation would lift into the 2-3% target range and the unemployment rate would approach the NAIRU. Accordingly, the Bank forecast core inflation to lift to 2.25% in 2019 and 2020 and the unemployment rate to fall to 4.75% by end 2020.

The December quarter inflation report printed underlying inflation at 0.4% and headline inflation at 0.5%. These numbers were around market expectations although there was a “whisper” number in markets of somewhat lower. Importantly, the print for underlying inflation for 2018 was 1.7% – in line with the Reserve Bank’s forecast from its November SOMP.

The November inflation forecasts for 2019 and 2020 are 2.25% – a marked lift from the 2018 actual of 1.7% but it is likely the Bank will persist with this confident signal in its February forecasts. Even if it decides to lower the 2019 forecast to 2.0% in recognition of a lower growth forecast for 2019 the number would still be in the target zone (2–3%) and the gradual progress would be emphasised by maintaining the forecast for 2020 at 2.25%.

Their views on the labour market have been cautious. The unemployment rate has already reached 5% while the Wage Price Index growth rate has lifted in recent quarters to 2.3%. Scrutiny of a chart which, for the first time, was provided in the November SOMP points to a cautious forecast of WPI annual growth reaching 2½ per cent by end 2020.

However, the September quarter GDP report has disrupted the RBA’s comfortable position on the growth outlook. With growth only printing 0.3% in that quarter it would be necessary for the December quarter to print 1.2% to achieve the November forecast of 3.5%. The 2018 growth forecast is likely to be lowered from 3.5% to 3.0%. But what will this mean for the 2019 and 2020 forecasts?

We know that the Bank has assessed a minimal wealth effect on consumption and the Q3 growth report is unlikely to have changed that view. Even further negative evidence on house prices in Sydney and Melbourne is unlikely to change the qualitative assessment that the wealth effect was minimal while house prices were booming and therefore will be minimal in reverse. RBA Director Harper recently played down any evidence of a wealth effect in an interview with Dow Jones late last week.

Westpac differs in that regard pointing to a fall in the savings rates in NSW and Victoria over the year to September 2018 of 1.7 ppt’s in NSW and 1.9 ppt’s in Victoria. We expect some reversal of that effect in 2019 and 2020 pushing growth in consumer spending down from our previous forecast of 2.6% in each year to 2.4%. Our simulation work suggests that the impact on consumption of this negative wealth effect may be significantly larger. We expect the Bank will maintain its current view that consumption growth will run at 3% in both 2019 and 2020.

We also differ on the likely downtrend in residential construction in 2019 and 2020, “Dwelling investment has remained high and… should remain at a high level for the next year or so” (Nov SOMP). Based on the recent falls across the board in dwelling approvals (detached and multi) we look for a 8% fall in new dwelling construction in 2019 and 5% decline in 2020.

Westpac’s growth forecasts are 2.6% in 2019 and 2.6% in 2020. Those forecasts are only slightly below trend and consistent with steady rates in 2019 and 2020.

We expect the RBA will forecast growth of 3% in 2019 and 3% in 2020. That higher growth will reflect a limited slowdown in housing construction and no meaningful wealth effect. Those growth forecasts are still above trend and likely to ensure the view that the next move in rates will be up.

Indeed, in his comments to Dow Jones, Director Harper repeated the expectation that the next move in rates will be up. While he emphasised these were his own views it is important to point out that Dr Harper has a distinguished past in the Research Department of the Bank. Some of the Bank’s senior executives would have been colleagues. His comments carry much more weight than the personal observations of an outside director.

Of course we need to be mindful that the comments preceded the shock from the monthly NAB Business Survey that showed a collapse in business conditions (business confidence held around previous levels). Risks around business surveys that are taken in January must be recognised. Indeed that particular survey has shown some volatile movements around the Christmas period. It is doubtful that the Bank would change its longstanding rhetoric on the basis of a January Business Survey.

If, however, we thought the RBA was likely to lower its growth forecasts in 2019 and 2020 to 2.5% or less then we would certainly expect it to adopt an easing bias.

Other factors which may impact market thinking are the higher recent levels of BBSW and associated out of cycle hikes by some banks. The RBA will probably view those developments as likely to exacerbate housing price weakness but due to an insignificant wealth effect, will be unlikely to materially change their forecasts.

Accordingly, despite lowering its growth forecasts for 2018 and 2019, we expect the Bank will retain its current stance that the next move in rates will be up.

Recession it is then!


  1. What’re we at now? 28 years without a technical gross GDP recession?
    More dead wood than Black Saturday.

    Go short insurance, long firehoses.

    • The trouble with that is we might be forced to buy a whole lot more fire hose before the RBA/Fed/ECB/BoE is done piling up the fuel.

  2. GunnamattaMEMBER

    I think he is right that they will sit on their hands yet again, but I actually think this meeting is ‘liver’ than any meeting in ages and that the only reason they will sit on their hands is politics – we are now firmly in the lead up to the next Federal election and if they were to cut then that would become political (which the RBA abhor) after the comments about the ALP causing a recession (which the Torynuffs have already caused).

    The data is clearly pointing downhill. God only knows how they conjured up yesterdays print. I reckon chunks of the decisionmaking would actually want to move soon, and would be all too aware that if they hold off now then the next time they can move (maybe June) the country might actually be in a recession.

    • CaptainFeatherSwordsGhost-TheHaunting

      Come May/June they will wish they cut in Feb. Expect claims of ‘no one could have seen this coming’ once the recession is balls deep – massacred property speculators frothing out of the orifices of the economy only to drip onto the 100 thread count sheets of destiny.

      • GunnamattaMEMBER

        Good point, giving that extra fry to property speculators probably is worth holding off until June.

        I’ve just never given the RBA the sort of social schadenfreude chops it should be aspiring to.

      • CaptainFeatherSwordsGhost-TheHaunting

        holding off until June….please, I’m already nursing a semi !
        ” we don’t need no water let the mutha-f-ers burn’

      • Thanks Captain for reminding me I was due to give TBHG a listen after Everlong gets off rotation.

    • “(which the Torynuffs have already caused”

      FFS Gunna – can’t we go back to having some rational economic discussion around here. The recession is caused by every stupid self-seeking treacherous lot ho have been in power in this country for the last 60 years – of all sides. Add on top of this Heads of Treasury like Ken Henry, Parkinson Fraser et al and a string of RBA Governors.

      I am not arguing that the economics and politics of either side is not BS. However if we are going to understand the mess we are in we have to get past this petty name calling myopic BS.
      I know that’s not the aim around here. I guess you tend to be more rational than the rest so maybe you might see that what ios going on here is not adding anything of any use.

      • Yup. At the end of the day the mob in charge makes not a jot of difference — it is theatre, nothing more. You get the same from both sides — just in differing quantities i.e. the favours get distributed differently.

        The culprit is the debt-based monetary system — a system embraced by both sides. Nothing has done more to corrupt the economy and corrupt the people. There is no mechanism that can match ‘money from thin air’ to distribute wealth from the working stiffs to the 0.1%. None.

    • I would have hoped they were professional enough & data driven to make the cut or raise whenever needed & screw the politics. But you are right no doubt.

  3. Makes me glad that I have been paying off my investment loan at breakneck pace over the last 5 or so years and have gotten it down to a level where interest rate increases will not hurt too much.
    The downside is that the benefits of negative gearing have been reduced and I am looking at paying some $3k back to the ATO this year…. and its not like I am raking it in as far as income goes.
    It’s all rather odd.
    It seems that one trying to “do the right thing” will either end up paying interest to the bank or paying tax to the ATO.
    I think I need a smarter/dodgier accountant.

    • I’m just a novice when it comes to property specufesting, but isn’t the goal to pursue capital gains over something as petty as a longterm rental stream?

      The entire tax regime surrounding property specufesting appears ‘geared’ toward capital gains.

      In regard to your tax bill, it’s fairly normal to expect to pay tax on any investment returns. At least, it’s fairly normal outside of Australian property.

      • My accountant suggested I look at buying another property but I flatly refuse to go into more debt.
        For what its worth, my investment properties are actually two large units that I had built on a block that had an old house on it.
        So, I don’t count myself as a property speculator, negative gearing vampire as such.
        In fact, I am against negative gearing, particularly for existing properties.

    • Negative gearing is built on the idea that paying interest to the bank is preferable to paying tax to the ATO.

      Though the former tends to be glossed over by people spruiking the latter.

  4. Actually, it is theft (from Creator & community) to speculate in land price. Humanity did not make the land and the owners do not give it value. The only rational solution is to ditch all taxes and collect instead the annual rental-value of sites privately occupied, as sole source of public revenue. That will bring land prices to nil (+value of improvements), give labour a strong base to bargain, and minimize any need for welfare state. Whether banks lose security and live or die, they must not be bailed out; credit unions can form locally. The power of RBA to manipulate interest rates must be ended — let currencies float in free market.

    • The issue with taxing land and other assets is that the owner is not really the owner, it’s the government. The reason for this is that ownership by the individual becomes contingent on paying money to the Govt and if the owner refuses the government has a right (in effect) to take possession of the asset. This is a socialist construct and economies don’t do well in environments where private property is not properly protected.

      This statement of yours: “The power of RBA to manipulate interest rates must be ended — let currencies float in free market.”
      …. is unquestionably correct. This very act would be enough to obliterate all known bubbles that monetary policy has nurtured. Once the the real level of interest rates is discovered every bit of malinvestment (incl speculations) would be exposed.

      • This is a socialist construct and economies don’t do well in environments where private property is not properly protected.

        Indeed. Just look at the economic catastrophe in Switzerland with its land and wealth taxes.

      • Switzerland is not socialist at all — in fact, Govt is least prevalent there than in any Western democracy. Still, there is always room for improvement. Certainly I’d agree that Switzerland is close to a model democracy that exists today, but hey, that would put too much power in the hands of the citizens so I can’t see it eventuating here. The Govt exist to tell the plebs how to live their lives.

      • the difference in Switzerland is that government is respected there – and responsibility is the cornerstone of their civic duty. Its not a power play, its about communal and individual responsibility to do whats best. Its quite admirable really, but its a cultural situation developed over a very long time, and cant just be transplanted as a system wholesale to another place.

      • @Chris
        The cultural angle may have some merit but I’d go further and say that there are other factors fundamental to the appeal of politics there i.e. the system of direct democracy means that the volume of new legislation is kept to a minimum given the sheer inefficiency of that system. The statute book should, by default, be kept to a bare minimum. Large and burdensome statute books are an imposition on the citizens, from both a financial and personal freedom perspective.

        Equally, the division of the country into cantons diminishes the ability of Govt to project power i.e. competition between the cantons means that any attempt to impose on the citizens of a particular canton could well lead to the departure of many of those citizens to an alternative canton (taxpayers getting up and walking out — never a good thing for the budget).

        Finally, relative to most other western democracies, the federal govt in Switzerland is barely noticeable. If you asked 100 Australians who the Swiss Prime Minister was you’d be lucky to have one give you the right answer. Ask about the US, Germany, Britain etc and it’s a different story. The Swiss govt keeps its nose out of foreigners’ business and it tries to do the same at home too. This is the mark of good government.

  5. Your first para is in error for 4 reasons.

    1. Usually government (i.e. the Crown) grants land to ‘owners’ in fee simple. Historically, these were ‘owers’ obliged to pay feudal dues, but manipulative landed classes have ensured these have now been largely escaped. For all effective purposes, fee simple holders (and long-term holders of Crown leases) ARE effectively the owners.

    2. It is not any technicality about ‘ownership’ that has real weight, it is the privatized right to use & benefit from a specific cadastral site or quantum of resource. The exact form of tenure (e.g. allodial, fee simple, Crown lease) does not matter; only the RIGHT does. That right is a private monopoly given by the public and the public is entitled to payment of its full value.

    3. The value of the monopolistic right granted by the public is its annual rental-value set by the free market (NOT some rate declared by politicians). Collecting this rental value is NOT a tax (i.e. arbitrary or artificial imposition) of any kind. Rather, it is payment to the community for the value of a good (the right) that has been purchased & bestowed by the community.

    4. It is a misconception to believe that a human being can really own land. The land was given by Creator; we may have rights or ability to use it but we can never own it. On death we gobeyond with nothing; all turns to dust & ashes save the spiritual value of our lives. Struggling to steal the Creator’s land, or value in it, forms NIL survivable spiritual value (on the contrary, it is theft and forbidden)!

    • If you own an apartment in Opal Tower you’d better start communing with your Creator because you’ll need a miracle to get your money back!

    • Dspain
      You are assuming all sorts of logical falicies here.
      ‘The land was given to us by a creator???’. Establish first that there was a creator. Evidence please.
      ‘We have the right to use it but we can never own it’. Not even biblical. Ever heard of thou shalt not steel?

  6. The idea that there won’t be a negative wealth effect is foolish. What matters isn’t the average, it’s the marginal, and the marginal are first home buyers, who are seeing their equity vapourise, investors who are being forced off interest only mortgages to P&I loans and those who would have borrowed more but are encountering HEM constraints and constraints on LVR amd DTI. All of these groups are going to curb consumption and that’s a fact.