Brokers and industry bodies have praised yesterday’s decision by the Reserve Bank to leave the official cash rate untouched, while cautioning against future rises. In its statement yesterday, the RBA said it was satisfied with underlying inflation, and believed the inflationary impacts of widespread flooding would be negligible. Loan Market chief operating officer Dean Rushton applauded the decision, and urged the bank to resist any rate hikes in the immediate future.
“It is understandable that the RBA has resisted increasing rates this month with the nation trying to recover from natural disasters in Queensland and Victoria. The RBA could do a lot to restore consumer confidence by remaining on the sidelines, at least for the first half of this year,” Rushton said.
MFAA chief executive Phil Naylor expressed optimism at the Reserve Bank’s outlook.
“It looks like the RBA is saying that for the time being the inflation outlook is benign, and therefore we are entitled to expect that the cash rate will be on hold for many months, maybe most of 2011,” Naylor told Australian BrokerNews.
Mortgage Choice spokesperson Kristy Sheppard, however, told Australian BrokerNews she is not as confident the Reserve Bank will leave rates untouched for the entire year.
“The RBA has been looking medium term rather than focusing on the immediate future so I wouldn’t be surprised if we see one or two pre-emptive cash rate rises later this year,” she said.
“Leaving the flood effect out of the equation Australia continues to have low unemployment and is facing a resources boom, which pushes wages growth and improves consumer and business confidence. Hence, we are still looking at strong inflationary pressures for the medium term. Regardless, we’d be delighted to see the cash rate remain on hold for the entire year to help improve the housing finance market.”
And despite the RBA decision, Sheppard said out-of-cycle rate rises cannot be ruled out.
“I hope lenders don’t make further out of cycle rate moves, but it is always possible, and more likely these days now that the link between the cash rate and variable interest rates is loosening,” Sheppard commented.
“Many lenders’ longer term funding costs are still rising, albeit slowly, which could result in them moving independently of the Reserve Bank decisions. Borrowers should be aware of this and watch their lender closely to see what moves it makes. Any lender that makes the first move will suffer a heavy blow to its reputation,” she said.
In its first meeting of the year today the Reserve Bank opted to keep rates on hold at 4.75 per cent.
The decision comes on the back of economic data out last week showing inflation was running lower than expected.
“This is a good start to the year for mortgage holders,” says Domain.com.au spokesperson Carolyn Boyd. “It’s likely there will be rises later in the year, so this presents a window of opportunity for people with housing debt to pay a little extra down.”
Each 0.25 per cent interest rate rise adds another $50 to the monthly cost of an average Australian mortgage.
The official interest rate is now 4.75 per cent. Mortgage holders on variable interest rates are being charged a standard variable rate of about 7.83 per cent by their lenders.
Today’s decision will be a boost to the opening of this year’s property market, which is just starting to ramp up now that the summer holidays have officially ended.
Now that we’ve got a better idea as to how these floods are affecting
things and having seen the Q4 CPI, it’s fair to conclude that the RBA won’t
be hiking rates in February, or March either. I don’t think a March rate
hike is a zero probability event though, but taking everything into
consideration, I think it more likely we’ll be seeing a rate hike in
April/May – most likely May with the odds of them waiting till 2H11 very
low in my opinion.
Think of what we know. The fact is, the global economy is growing at a
rapid clip. Indeed the IMF expects growth around 4.75% in both 2010 and
2011. When you consider that the average is around 3.5%, well that’s pretty
strong global growth, 2yrs running I might add. So while we spent much of
last year debating the strength of the globe– in the face of very strong
data – it’s certainly not reasonable to refute its strength now.
This is all important, it sets the stage for everything, because if you’re
a lonesome central bank worried about a once in a generation commodities
boom, and the RBA is, then global growth is kind of critical. Look around
the globe, what does one see? A not so subtle combination of strong growth
and exceptionally loose monetary policy, that’s what. The problem is, this
combination according to theory, history and logic, is inflationary – and,
as we now know, inflation is actually rising.
Naturally there are risks, of course there are. Concerns over sovereign
debt are still rife etc. Yet in the absence of those risks, which lets be
sensible are quite extreme events, what is going to stop the momentum? I
mean what is more likely, the collapse of Europe or China and renewed
global depression (not zero probability events obviously) or a somewhat
less dramatic outcome – ongoing economic recovery. Note that economic
policy around the world, is incredibly accommodative and if you think
austerity is going to change that you’re dead wrong. Austerity barely makes
a dent into the stimulus provided by the world’s major central banks.
Doves in the Australian market are content to overlook this and instead
suggest that as domestic CPI is within the band, that as consumer spending
is weak and that given housing indicators are sluggish, the RBA can afford
to hold rates steady. The picture some of these people try to paint is one
of a sickly economy that is struggling under the unbearable weight of high
interest rates – proved by the weaker run of data lately. For others, the
economy is fundamentally sound, yet consumers are cautious, and inflation
First up, the view that the economy is weak or struggling is just simply
wrong – absolutely far-fetched. For a start, interest rates aren’t
unbearably high. They’re barely restrictive in fact and indeed mortgage
rates are only slightly above average with business rates only a little
higher than that. Don’t forget that in 2007, a time when new home loans
rose by over 1% per month, when building approvals rose slightly more than
that and retail sales were pumping 0.6% per month – mortgage rates were a
good ½% higher. It is implausible that rates are, on an economy wide basis,
providing much of a burden.
I think analysts who adhere to this view are simply confused. Focussing on
one or two data releases (retail sales etc), out of context I might add,
and ignoring more reliable data (the unemployment rate and the national
The 2nd view which I think is more common, is however, just as dangerous.
Granted, some data has been bizarre, and recent CPI prints do support the
idea that there is no urgency in hiking rates. I can appreciate that and,
following the weaker than expected Q4 CPI concede that point.
My worry is that some of the data points used to justify the rates lower
for longer argument, are actually giving misleading signals and I think
there are sound reasons to question them.
I’ve talked at length about the monthly retail survey. I suspect that it is
highly unlikely sales volumes are as weak as suggested by this survey and
the retailers association. They are inconsistent with the national
accounts, with job’s growth even jobs growth in the retail sector which has
been robust. By the way, the AUD expanded by 14% in 2H10 and yet prices in
currency sensitive areas were down much less than that. So there is some
significant margin expansion going on here and margin expansion isn’t a
sign of a weak retailing environment.
As to the CPI data more broadly – well unquestionably, the headline and
core numbers produced by the ABS show inflation moderating. I don’t dispute
this. What I dispute is that this then means true underlying inflation, the
persistent underlying trends driving CPI have changed. As I mentioned on
the day (and some may remember many years ago) inflation in Australia is
skewed. It is largely driven by food (including booze and smokes), housing
(rents, house purchase, and utilities), health and education. Normally
about 80% of the gain over any time period is driven by these components,
noting that they account for around 50% of the basket of goods surveyed.
Throw in fuel, and around 90% of the increase in the CPI over time can be
explained by 55% of the CPI basket. On the downside are things that either
post modest-flat inflation anyways, or even deflation on a consistent
basis. The important thing to note is that the secular forces driving
prices higher remain and it is only the timing of some of quarterly swings
that have given the illusion of moderating inflation. In essence, we’ve
Now the reason these dovish views are dangerous, is because even if they
are accurate, they don’t change, well they shouldn’t change the policy
assessment – the arguments for higher rates.
Think about it. Let’s just assume the doves are correct. Well so what? If
consumers are being cautious it is a voluntary choice. Ok so they are
lifting savings now, but there is no compelling reason to expect this to
continue in the future, with strong employment and incomes. Key point being
it could all turn on a dime . Ditto CPI. Let’s assume it is moderating now
will that be the case in 6-12 months, especially with global growth and
The bottom line for the RBA is whether they can afford to sit around and
wait to see who is right. And that’s where we get down to an assessment of
risks. On which side would they rather err? Leaving rates lower for longer
and then being caught out when retailers discover that spending isn’t that
bad after all, or hiking rates gently again soon, only to find that
consumer saving rates continue to rise, housing remains sluggish and
consumers cautious? Put another way, with interest rates barely above
average are one or two rate hikes in 1H11 going to seriously derail things?
No of course not. But if they leave it too long they risk getting into a
panic later in the year or early next. It’s quite conceivable that we
could wake up in 2H11 with strong retail sales and CPI above the band, a
global economy that is booming amidst exceptionally loose monetary policy
globally and domestic rates only just above average.
Why risk it? It would be completely unnecessary and would risk
destabilising the economy. The path of least regret is for the RBA to
tighten and soon, this makes the most sense, regardless of the current
dataflow. Do it gently now, when the downside is so small, so as to avoid a
panic run later.
The interesting thing to note is that when I look around at the run
forecasts for 2011 and 12 I’m not seeing too many forecasting doom and
gloom – even from the doves. Back in November, before the surprise Q3 GDP
outcome, the RBA was forecasting GDP growth of 3.75%y/y to December 11 and
4%y/y to December 2012. We’ll find out how the RBA has changed that this
Friday when they release the February Statement on Monetary Policy. Me, I’m
still looking for GDP growth 3.75%y/y to December 2011 and some thing like
3.5% in December 2012 – noting that assumes a handful of rate hikes. The
problem is that domestic demand is likely to quite a bit stronger than that
– 4.7% to December 2011 and 4% to December 2012.For the calendar year 2011
I reckon growth will be about 3.2% and 3.6% in 2012. CPI, both headline and
core, will likely be back above the target band by the end of the year.
If the RBA can see sense, then I would think we can expect them to hike
again, perhaps as early as March, but more likely April/May, the key issue
being whether they think it necessary to wait for the CPI. For the reasons
outlined above, I would argue it is not necessary, assessing the relevant
risks, it should manifestly clear what the RBA needs to do.
Overall there is nothing too surprising in these minutes. The RBA suggests the decision was ‘finely balanced’ but that ultimately, there was no urgency to hike at the meeting. Global data had “been broadly in line with expectations” and “there had only been a limited amount of data on the domestic economy”.
As a result, and with the exchange rate doing some of the work for them, it was determined that there was, and as I argued at the time, a case to wait so that they could assess some of the downside risks. In the RBA’s words “the economy was still expected to grow at trend in the near-term, credit growth had softened somewhat and the rise in the exchange rate would, if it continued, effectively be a tightening in financial conditions at the margin….it was also still possible that downside risks to global growth could materialise.” So with nothing to change the Bank’s view 1) that Aussie growth was around trend; 2) or that inflation was close to the target or moderating; 3) or on global uncertainties the Board “judged they had the flexibility to [hold] on this occasion.”
For mine, that all makes sense and as I argued at the time, some of these issue will probably be resolved by the November meeting. At the very least we’ll have a much better idea of where the global economy is tracking (US Q3 GDP, retail, payrolls industrial production, China’s GDP etc etc) and how urgent the inflation problem is (domestic CPI on October 27). We’ll have a better sense of where the downside risks lay.
For mine, the data we have at hand shows the global recovery on track. Q3 growth looks like it will be slightly weaker than Q2 growth (which was a cracker) but not by a large margin. The US economy looks much less likely to slip back into a recession and so, in my assessment and I suspect the RBA’s, some of the global downside risks have diminished a bit. I know that may sound odd, it certainly doesn’t ‘feel’ that way with all the press and especially when you read all the claptrap from the Fed, but this is what the data is showing us. Even money printing doves at the Fed don’t anticipate a new recession or deflationary spiral.
With that in mind, and barring a collapse in Q3 inflation, a sudden deterioration in the US economy or financial market sentiment, it would seem clear that we are going to get a rate hike this year. Indeed the “Board recognised that it could not wait indefinitely to see whether risks materialised.” November still looks like the most likely date for mine and at the very least I reckon futures’ pricing of 39% is way too low. Beyond that much will depend on 1) The Fed 2) what the AUD does in response to the Fed, 3) how big CPI is on October 27 and 4) what the commercial banks do.
Much to consider…
Had the major banks just followed RBA moves, the official cash rate would be much higher, according to the head of the Australian Bankers Association.
Steven Munchenberg, chief of the ABA, told The Australian that at the moment, the spread between mortgage rates and the official cash rate is about 100 basis points above the historical average.
“That’s taken into account by the RBA,” he said. “We think the official cash rate could be higher if the banks had just followed the RBA moves.”
While the major banks have been criticised by government for lifting rates out of step with RBA movements, Munchenberg says banks needed to better explain the reasons for doing so.
He admitted that justifying independent rate moves is particularly difficult given reports of record profits.
According to Munchenberg, Australian banks need to be highly profitable to attract international investors.
The Reserve Bank of Australia has expressed guarded optimism for the future of Australian property financing in the midst of the continued global tightening of credit availability.
In his speech on Friday to the Queensland division of the Property Council of Australia, the RBA’s Deputy Governor Ric Battelino suggested that the home and commercial property finance markets show signs of life despite an overall slowing of credit growth.
Battelino stated that the Australian economy is growing around trend, while inflation remains within the RBA’s target range. “This is a comfortable position to be in,” Battelino said.
But in spite of the overall health of the economy, borrowers are still displaying caution, with credit growing at a moderate 7% over the past year and household savings on the rise. “All this is consistent with households taking a more cautious approach to their finances,” Battelino said.
According to Battelino, most of the growth in credit since 2005 has been due to households borrowing for housing, while credit card debt, personal loans and margin loans have remained fairly flat.
Addressing the home loan market, Battelino indicated the weakening of other areas of borrowing is not cause for concern for the RBA given the relative health of housing lending. “The current picture is one where borrowing for housing is broadly growing in line with income, house prices are stable and there is little appetite for other forms of debt,” he said. “From the Reserve Bank’s perspective, this seems to be a satisfactory state of affairs.”
In news just announced, the RBA has decided NOT to increase interest rates today.
Some may be surprised especially considering the higher inflation numbers and indications from the RBA Governor in the last few weeks where he hinted he would use the cash rate as a lever to curb spending. It’s not “if” but “when” a rate increase will be forthcoming however the RBA have decided to stick with the ‘wait and see’ approach to our economy, which continues to recover well.
The RBA statement was a breath of fresh air. Ultimately and relative to current market pricing (57% priced for a cut) the RBA statement is hawkish. There is no denying that. In reality though, they don’t seem to have changed their view much. I love them for that. I was actually concerned they may capitulate in the face of extreme bearish pressure – but no. “The global economy has continued to expand over recent months, consistent with a trend pace of growth. The expansion remains uneven with the major advanced economies recording only modest growth overall, but growth in Asia and Latin America, to date, very strong.”