UBS: “material dovish shift in the RBA”

Via the excellent George Tharenou at UBS:

RBA Lowe changes CPI target to actual (not forecast) inflation

RBA Governor Lowe’s speech initially reiterated their forward guidance to “not increase the cash rate target until progress is being made towards full employment and it is confident that inflation will be sustainably within the 2–3 per cent target band”. However, with the support of the Board, Lowe made a material dovish shift in the RBA’s operation of monetary policy. Firstly, Lowe noted “our forward guidance has been forward looking – we have focused on the outlook for inflation, not just current inflation.” But, “we will now be putting a greater weight on actual, not forecast, inflation.” Indeed, Lowe added “The Board will not be increasing the cash rate until actual inflation is sustainably within the target range. It is not enough for inflation to be forecast to be in the target range. While inflation can move up and down for a range of temporary reasons, achieving inflation consistent with the target is likely to require a return to a tight labour market. On our current outlook for the economy – which we will update in early November – this is still some years away.”

Lowe also elevates importance of (actual) full employment, not just ‘progress’

Secondly, Lowe also specified “we want to see more than just ‘progress towards full employment’.” This went even further than their October meeting which added “addressing the high rate of unemployment as an important national priority.” UBS still expect likely rate cut to 0.1% in Nov; while chance of QE also rises Looking ahead, Lowe did not want to pre-commit, saying “the Board has not yet made any decisions,” and referenced Debelle’s options, which led us to expect rate cuts. However, our assessment of Lowe’s ‘issues they are working through’ was a significant lowering of the hurdle to easing near-term. Specifically, the first hurdle is “how much traction any further monetary easing might get in terms of better economic outcomes. When the pandemic was at its worst and there were severe restrictions on activity we judged that there was little to be gained from further monetary easing.” But now (UBS emphasis), “As the economy opens up, though, it is reasonable to expect that further monetary easing would get more traction than was the case earlier.” Second, Lowe flipped to now argue lower rates reduce financial stability risks, saying “A second issue is the possible effect of further monetary easing on financial stability and longer-term macroeconomic stability…It remains an important issue today, but the considerations have changed somewhat. To the extent that an easing of monetary policy helps people get jobs it will help private sector balance sheets and lessen the number of problem loans. In so doing, it can reduce financial stability risks.” Third, “our balance sheet has increased considerably since March, but larger increases have occurred in other countries;” and in Q&A added, ‘Australia’s 10-year yields are higher than any Western economy. Is there any benefit in having those yields come down…If we buy 5 to 10- year bonds, what benefit would that give in terms of jobs?’ This strongly suggests the RBA is considering QE near-term. However, the timing remains unclear, saying ‘ We are taking our time to work through that issue, but that’s what we are discussing at each meeting.’ One argument against QE is “The RBA’s open market operations and the Term Funding Facility have both contributed to a plentiful supply of liquidity” and “very large increase in the RBA’s balance sheet”, which “should be seen as a further easing of monetary policy”. However, in Q&A Lowe noted ‘On the TFF, we have done what we reasonably can.’ Overall, UBS still expect the RBA is likely to cut rates from 0.25% to 0.1% for all of the targets of the cash rate, 3-year bond yield, and TFF (and lower the deposit rate to ~5bps). Meanwhile, the probability of QE went (again) up today, albeit not necessarily in November, but seems increasingly likely over coming months.

Finally, ten years late. They’ve realised that they can’t forecast and won’t try to tighten on that basis. This is the equivalent of the Fed’s recent proclamation that it will let inflation run hot (if it can find some).

I now expect both a rate cut and QE in November. Next year it will be negative rates and more TFF.

There is no way back. Only going deeper. Until the embrace of MMT.

David Llewellyn-Smith


  1. RobotSenseiMEMBER

    Pretend you’re a FHB: where on earth is this going? Hold back, or borrow as much as humanly possible?

    • I was a FHB. Buy within your means. Borrow as little as possible. Buy something detached, quality but further out if need be. Pay down your debt so if you plan to upgrade you can always borrow as little as possible with each future step up into something better. My 2 cents.

      • The big winners are the ones who borrow as much as they can.
        This is the last leg of the housing bubble in Australia and its going to be big.
        When banks start advertising home loans at 1.5% watch peoples eyes light up.
        Home loans dropping from 3% to 1.5% means that people can afford to borrow double the amount, therefore house prices will double.
        The maths does not lie.

    • Zero IR is a new thing in Oz. In the EU is an old thing and this is what happened there and will likely happen here too.
      Knee jerk reaction is to borrow as much as humanly possible. It’s a natural reaction-“money for free”.
      Five, six years later they have something called ” Blocked citizens”. In fact, around 15% of the adult population is “Blocked”.
      These Zombies can have only one bank account and everything that goes there above the poverty line is automatically taken by the banks.
      Last year I “unblocked” one of these guys by buying his block of land for 37% less than he paid 6 years ago. RE is in a zombie era. Everything is priced high, but nothing is moving. Properties are advertised for years.
      The only difference is currency. In my old country, we can’t print Euros.
      In my opinion, when SHTF, authorities here will rather destroy the purchasing power of Oz dollars, and push the county into the third world, than admit past mistakes.
      Since they removed residential land from the CPI index, the price of the same increased by around 600% per square meter. It was by design.

      I have a kid in your situation. He is aware of everything and to be honest I really can’t give him advice. He is a high-income earner and the only reasonable advice I could give him is to make himself competitive in his field. So far so good, but it shouldn’t be like that.
      Good luck with whatever you decide.

      • You mean you’re suggesting to your son that he becomes rich by being good at his day-job? What kind of parent are you!
        That kind of thinking died 30 years ago. There’s only one way to get rich today, and excelling at your job it isn’t it – unless that job has property involved in it somewhere down the line.

      • Very interesting. But, I had the impression that the European countries who did not join the Euro (Iceland, UK, Czech Republic) were able to get out of the mess by devaluing their own currency modestly. They didn’t have to totally trash it. Wouldn’t that be true for Australia as well?

        • Devaluing your currency makes you poorer and lets poorly run businesses off the hook i.e. there’s less pressure on them to run more efficiently or be more productive. In short, the whole currency devaluation thing is the product of bullsh1t economics.

          Would you rather your $A bought $US1 or would you rather it bought you 30% less i.e. 0.70 USD?

          It’s not rocket science.

          • Hmm.. good question. I guess the floating currency is like seat belts in a car. If you are well managed like Norway or Switzerland, you won’t need to devalue, so it’s not an issue. But, if you screw up, the floating currency will save you from disaster.

      • @karloo cool post- do you mind telling us which country you referrng to? I see those cheap European home posts on socials where you can buy cool scando cabins or spain/italy country escapes for what seems like a bargain- is this the sort of blocked sale you talking about? Banks formalizing arrangements to make ‘Blocked’ punters here would not surprise me, I see many falling into bank trap of being ‘milked’ for whatever rates once stuck in the debt and unable to finance away/exit position, it wouldnt surprise me to see rules change to reduce their accounts either…. in fact, a rate discount on signup if you agree to only have one account with your lender would probably sell like hot cakes….hardly anybody here knows what any/all money clause or set off actually means…

      • On the ABC yesterday they interviewed a woman who took a mortgage holiday (because she owns a business which is foreign tourist reliant) and she was saying that on the day the holiday ended, two of her lenders (yes, it sounds like she has some complex affairs), lifted the entire amount owing over the past 6 months from her accounts — no advance warning, a total of $50k gone that day. She has another 2 lenders (faarck) that are sitting tight for now.

        2 things:
        – those banks just took the money without any warning
        – would you want to be the other two banks who didn’t take any money?

        • Probably not. I have a good size family home and I sleep fairly well at night. Happy to punt on stocks which I can sell at a moment’s notice. Being caught with an asset as illiquid as property is no fun.

    • Jumping jack flash

      “where on earth is this going?”

      10 million dollar median house price by 2050.
      Median wages around 95K, which is optimistic at the current growth rate.

      Think how this will be possible. There are only a couple of parameters.

  2. happy valleyMEMBER

    NIRP – the most ultimate of rapes of depositors by a banker and the most enjoyable, which combined with smarmy Josh’s totally irresponsible lending laws, make a total nonsense of credit risk assessment being pricing relevant for a depositor as that criterion becomes ridiculous/insane in the context of banks being the most highly leveraged credits you will ever come across, they operate a hot money book, and Strayan banks are possibly among the most dodgy in the world and whose customer deposits are “protected” by a totally worthless and fraudulent guarantee capped at $20bn per bank with deposit bail-in to operate to boot . The only justice left for depositors is to see all 4 Strayan majors go down the shoot and the shareholders and their franking credits with them. It’s a totally f.cked country in a totally f.cked world.

    • But of course! The rimjobs over at the RBA think lowering the rates is a ‘free lunch’ — but someone always pays.

      In this case, savers.

      It ain’t rocket science, but it seems like it is to some.

      • happy valleyMEMBER

        Years ago, you could probably have some respect for the RBA but that’s totally gone under the current and previous happy clappies, Captain Phil and Captain Glenn. Single handedly, these two have made a bit of a joke of the financial system. Anyway, Captain Glenn now on the Mac Group board – so, all good. And where to for Captain Phil post RBA?

  3. How can you just leave me standing
    Alone in a world that’s so cold? (So cold)
    Maybe I’m just too demanding
    Maybe I’m just like my father, too bold
    Maybe you’re just like my mother
    She’s never satisfied (she’s never satisfied)
    Why do we scream at each other?
    This is what it sounds like
    When doves cry

  4. So.. bullish for silver, amirite?
    Y’all can complain about zero interest lending your money to a criminal enterprise, or get on board.

    This AUD smashed business doesn’t match with my plan to buy a dip. sigh

    • It’s a great shame too as I’m sitting on more cash than I’d like. Bargains galore seem an ever-distant prospect 🙁

  5. Jumping jack flash

    “The Board will not be increasing the cash rate until actual inflation is sustainably within the target range. It is not enough for inflation to be forecast to be in the target range. While inflation can move up and down for a range of temporary reasons, achieving inflation consistent with the target is likely to require a return to a tight labour market. On our current outlook for the economy – which we will update in early November – this is still some years away.”

    It is the colossal wad of debt, and the insatiable need for larger and larger piles of debt that absorbs all the capacity out of the system and prevents the creation of new jobs and/or increasing wages, which prevents the increase of prices, which prevents the increase of wages (and around she goes).

    All the while the growing interest obligation on this nonproductive debt must be sourced and redirected out of the economy and to the banks to do whatever it is they do with it. Most likely they do not put it back in.

    He is correct. It will indeed be “some years away”.
    30 years after the last pile of debt has been handed out.

  6. ‘…Lowe flipped to now argue lower rates reduce financial stability risks…’
    Right. More snow less avalanche risk. The central bankers have no clothes.