RBA to cut another 1%?

Hi ULMM

You've presented a range of pretty compelling information on why the RBA should cut the cash rate.

So we seem to have

The arguments for a rate cut?
  • Capex falling - never a good leading indicator
  • With the CPI at 1.3% (and could well fall), no issue there with a bit of stimulus
  • Real Gross Disposable Income negative
  • Unemployment creeping up

Otoh, the arguments against a rate cut?
  • Asset price bubbles and their further fueling by way of a rate cut (and what happens when / if they burst). Certainly the Secretary to the Treasury is concerned by this, and if he is I'd put money on the RBA being worried, even if the A/T and the PM aren't.
  • If GFC Part II happens it would be nice to have some powder dry (above and beyond running the printing press or other form of QE).

Other factors / obsevations -
  • Real GDP languishing, but not negative (?yet?).
  • Questions over whether cutting rates will actually have the desired effect (particularly with regards Capex). And whether raising rates - as unlikely as that sounds - would have the effect of slowing the property market. My observation is that when people are confident they borrow - whatever the rate. Similarly when confidence is lacking, borrowing grinds to a near standstill - whatever the rate.

So you still think a cut is imminent?
 
The RBA has these major mandates (other than the obvious financial stability):

(1) Price stability
(2) Full employment

Think around these 2 important legal mandates.
 
The RBA has these major mandates:

(1) Price stability
(2) Full employment

Think around these 2 important legal mandates.
Lets get the actual wording, which is a bit bigger than those two -

The Reserve Bank Board sets interest rates so as to achieve the objectives set out in the Reserve Bank Act 1959 -

  • the stability of the currency of Australia;
  • the maintenance of full employment in Australia; and
  • the economic prosperity and welfare of the people of Australia. (<-you missed that one).

They go onto say -

Since 1993, these objectives have found practical expression in a target for consumer price inflation, of 2-3 per cent per annum. Monetary policy aims to achieve this over the medium term so as to encourage strong and sustainable growth in the economy. Controlling inflation preserves the value of money. In the long run, this is the principal way in which monetary policy can help to form a sound basis for long-term growth in the economy.

However.... the RBA also has responsibilities with regards Financial Stability.

Maintaining the stability of the financial system is a longstanding responsibility of the Reserve Bank. A stable financial system is one in which financial institutions, markets and market infrastructures facilitate the smooth flow of funds between savers and investors. This helps to promote growth in economic activity.

The Reserve Bank has a role both in mitigating the risk of financial disturbances that may have systemic consequences, and in responding to a financial system disturbance should it occur. The Bank works on these matters with other relevant agencies, mainly through the Council of Financial Regulators (CFR). The CFR, which is chaired by the Reserve Bank Governor, brings together the Bank, APRA, the Treasury and ASIC, with a mandate to contribute to the efficiency and effectiveness of regulation and the stability of the financial system

You seem to be saying "Recession dead ahead! Drop the cash rate now!" Which is fine. That's pretty much what you (not you personally) would think anyone should be saying.

But maybe we're going to hit that iceberg anyway - irrespective of what the OCR is.

And I'd be curious to know if you think a recession is a bigger economic scourge than an asset price bubble? (which is considered a serious threat to financial system stability and, it could be argued, a big kick in the guts to the economic prosperity of Australians - many of whom hold a significant portion of their assets in real estate)

Recessions come and go - usually pretty quickly.

Asset bubbles can take a lot longer to iron out.

Your thoughts?
 
But there is no bubble?
Some would disagree.

Treasury boss John Fraser fears about investment in housing, points to home renovation shows

"When you look at the housing price bubble evidence, it's unequivocally the case in Sydney, unequivocal," Mr Fraser told senators on Monday, at an estimates hearing. "It's certainly the case in the higher priced areas of Melbourne, and I base that on my own observation [as well as the data]."

"It does worry me that the historically-low level of interest rates are encouraging people to perhaps over-invest in housing," he said.

"I'm not talking just about buying housing, I'm talking about investing in housing. You've just gotta see a plethora of these renovation shows to realise something's amiss," he said.

And "economic prosperity and welfare" is just too obvious and vague.
I agree it could mean all things to all people - but the RBA doesn't operate entirely in a vacuum. Sure they're "independent", but the Treasurer (or his chief dog, the Secretary to the Treasury) is just a phone call away.

And it doesn't take away from financial stability concerns arising from a property market running wild.

Throw all this in the blender and it highlights that maybe the case for rate cuts isn't as black and white as a low CPI, rising unemployment and slowing economy would otherwise suggest.

And I note that Westpac (Bill Evans) whose name has been mentioned several times in this thread in fairly reverential terms - as of their 8 June commentary - are still forecasting the cash rate at 2% in June 2016.

(These things can change of course).

Any thoughts on that?
 
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Some would disagree.

Treasury boss John Fraser fears about investment in housing, points to home renovation shows

"When you look at the housing price bubble evidence, it's unequivocally the case in Sydney, unequivocal," Mr Fraser told senators on Monday, at an estimates hearing. "It's certainly the case in the higher priced areas of Melbourne, and I base that on my own observation [as well as the data]."

"It does worry me that the historically-low level of interest rates are encouraging people to perhaps over-invest in housing," he said.

"I'm not talking just about buying housing, I'm talking about investing in housing. You've just gotta see a plethora of these renovation shows to realise something's amiss," he said.



I agree it could mean all things to all people - but the RBA doesn't operate entirely in a vacuum. Sure they're "independent", but the Treasurer (or his chief dog, the Secretary to the Treasury) is just a phone call away.

And it doesn't take away from financial stability concerns arising from a property market running wild.

Throw all this in the blender and it highlights that maybe the case for rate cuts isn't as black and white as a low CPI, rising unemployment and slowing economy would otherwise suggest.

And I note that Westpac (Bill Evans) whose name has been mentioned several times in this thread in fairly reverential terms - as of their 8 June commentary - are still forecasting the cash rate at 2% in June 2016.

(These things can change of course).

Any thoughts on that?
What Evans is saying is there's a "soft easing bias"'and the next possible rate cut move is Nov15 and Feb16. I.e. if the RBA forecast of trend-rate growth of 3% next year becomes unattainable.
 
What Evans is saying is there's a "soft easing bias"'and the next possible rate cut move is Nov15 and Feb16. I.e. if the RBA forecast of trend-rate growth of 3% next year becomes unattainable.
Sure, but what he says and what he forecasts are two different things.

From our perspective, both the June statement and May minutes carry a similar message ? that the Board sees itself as having the flexibility to further cut rates if the circumstances require action but is making no explicit commitment. We see both comments as equally consistent and, given the RBA's forecast for underlying inflation to be in the bottom half of the RBA's 2-3% target range in 2016, assess the RBA's current stance as 'a soft easing bias'.

So he's having a buck each way.
 
Sure, but what he says and what he forecasts are two different things.

From our perspective, both the June statement and May minutes carry a similar message ? that the Board sees itself as having the flexibility to further cut rates if the circumstances require action but is making no explicit commitment. We see both comments as equally consistent and, given the RBA's forecast for underlying inflation to be in the bottom half of the RBA's 2-3% target range in 2016, assess the RBA's current stance as 'a soft easing bias'.

So he's having a buck each way.
to me it's clear, no change unless things deteriorate further. If they do deteriorate further, then are ready willing and able to act.
 
LOL'd @ home renovation shows pushing a bubble.....anything but failed economic policy, huh?

comments out of the RBA today very worrying from anyone's point of view.
 
there you go then.

I can see RBAs concern, the bigger this bubble gets the bigger the bang when it pops
Their aim will be a slow leak , rather than a pop . A slow leak is what happened in Sydney in 2003 .

No big crash . Just a loss of urgency amongst buyers . Most vendors didn't have to sell , so no massive wholesale arrival of motivated vendors .

Post GFC there were enough motivated vendors to give bargains to those looking , but no wholesale slaughter .

Cliff
 
there you go then.

I can see RBAs concern, the bigger this bubble gets the bigger the bang when it pops
http://www.smh.com.au/federal-polit...ture-spending-now-please-20150610-ghl1ri.html

"It's one thing to talk about the biggest infrastructure investment program in Australia's history, it's another thing to actually deliver it.

"It would be confidence-enhancing if there was an agreed story about a long-term pipeline of infrastructure projects," the governor said.

It would boost the finance sector, boost the real economy, and improve Australia's cities.

"The impediments to this outcome are not financial," he told the Economic Society of Australia in Brisbane. The funding is readily available, at very low interest rates.

The impediments are political.

Borrowing to fund infrastructure that will earn a return makes sense even if it runs up deficits and debt. It is "not the same as borrowing to pay pensions or public servants".

As I said yesterday Stevens is begging for fiscal stimulation but the Government can't because they've conned the voters into thinking the fiscal budget is akin to a household budget.
 
Australia will have to sit and wait for the world economy to pick up. This is when our resources will be in demand again which in turn fill fill up the goverment coffers.

The housing industry is largely propping up the our economy combined with modest tourism numbers. With an ageing baby boomer population we will see more tourism and lesiure focus so we should be concentrating our efforts in this sector to diversify our income.

I think the low interest will remain with us for some time however, the next election will be interesting as some forward thinking policies may be required as the population will get tired of the go slow approach. However, we are at the precipice and the wrong approach could lead to further misery.
 
http://www.smh.com.au/federal-polit...ture-spending-now-please-20150610-ghl1ri.html

"It's one thing to talk about the biggest infrastructure investment program in Australia's history, it's another thing to actually deliver it.

"It would be confidence-enhancing if there was an agreed story about a long-term pipeline of infrastructure projects," the governor said.

It would boost the finance sector, boost the real economy, and improve Australia's cities.

"The impediments to this outcome are not financial," he told the Economic Society of Australia in Brisbane. The funding is readily available, at very low interest rates.

The impediments are political.

Borrowing to fund infrastructure that will earn a return makes sense even if it runs up deficits and debt. It is "not the same as borrowing to pay pensions or public servants".

As I said yesterday Stevens is begging for fiscal stimulation but the Government can't because they've conned the voters into thinking the fiscal budget is akin to a household budget.
oh I love that you posted this article because I read it today and it strikes me as the most obvious and logical path forward. Embark on a massive debt funded infrastructure program that will actually deliver tangible returns (not just rubbish like insulation batts and plasma hand outs). Get the economy pushed and be able to deliver some small interest rate rises, that would pop the Sydney bubble and rebalance the economy. I would suggest the infrastructure needs to be anywhere but Sydney in a population dispersing attempt.... if it were me I would go the Pilbara and the Kimberley and deliver the hopes of the food bowl - agriculture is the coming boom industry.
 
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