The day's main points
The blog is about to be over as well. But it’s been a very eventful afternoon with another big move by the RBA, which is still worried that the Australian economy is weak and needs a bit of help. The main developments are:
- The cash rate has been cut to 2% from 2,25%. It has never been lower.
- RBA governor Glenn Stevens thinks there is still ‘spare capacity’ in the economy and with inflation low and stable, he saw the chance for another cut.
- The dollar has seen some volatility since the news at 2.30pm. It fell initially, as usual after a cut, but then spiked to US79c as investors spotted an end to the easing bias in Stevens’ statement. It’s fallen back a bit since though.
- Stevens again played down fears that a cut will fuel the already rampant Sydney housing market. He’ll work with other regulators to contain risks, he said.
- Mortgage holders will be better off if the banks pass on the cut, boosting spending power throughout the economy.
- Bad news for saver but Joe Hockey has as a result ruled out tax rises on super in the budget
- ASX200 share index closed flat.
And that’s it. Thanks for joining us. Have a good evening.
We should record at some point that the stock market was underwhelmed by the cut. At the close on Tuesday, the benchmark S&P/ASX200 index was one point, or 0.02%, lower at 5,826.5.
The cut in February prompted a sharp rise in the share market as investors anticipated a wave of cheaper money but this time around it looks like they suspect the party’s over.
Could that dollar move really haunt Glenn Stevens?
This is from Guardian Australia columnist the Kouk ...
Updated
Great chart here ...
Updated
Here’s a taste of some of the reaction to the cut.
Updated
Hockey rules out tax rise on super
An important point to come out of the Hockey press conference is that there will be no tax rises for superannuation. He said the rate cut had left savers facing lower returns and now wasn’t the time to hit them again.
I want to emphasise, it’s going to be very hard for people who retire and rely on their savings being in the bank. That’s one of the reasons why the Government has decided that it is unacceptable to have any increases in taxation on superannuation in the upcoming Budget, because now is not the time to hit superannuants who are facing potentially many years of lower returns on their savings in bank accounts.
What's happened today
- The RBA has cut the cash rate to at historic new low of 2%
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Falling commodity prices and weak investment behind the move, says RBA governor Glenn Stevens
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Dollar spikes as RBA fails to point to further cuts
- Household with a home loan of $500,000 will be $74 a month better off
- Joe Hockey welcomes the move but tells business to invest and create more jobs
- Chris Bowen says the RBA is doing what Hockey has failed to and boost the economy
Updated
Bowen said the cut was a sign the Reserve Bank was concerned about the economy and the lack of investment.
These are interest rates very low by historical standards, lower than during the global financial crisis. Lower than what would be expected for a Reserve Bank that would have confidence that investment and jobs would flow and clearly, those investments and jobs are not flowing and very clearly, the Reserve Bank is stepping in here and taking extraordinary action.
Chris Bowen speaks
Bowen accuses Joe Hockey of being incompetent and of relying on the RBA to give the economy a helping hand because of the failure of government policy.
What we see is a Treasurer failing at his job and the Reserve Bank stepping in to try to boost the economy, to create jobs, to create investment and to create confidence, because this Treasurer is simply not up to the job.
Labor treasury spokesman Chris Bowen will be speaking very soon, by the way...
More specifically, Hockey went on:
We will have a small business package that works in tandem with the decision of the Reserve Bank today to encourage small business to invest. And importantly, I would say to the business community, go out and invest and create more jobs. Go out and invest and create more jobs. Look for those opportunities that are going to grow your business over the medium and long-term, because they are there and we will do everything we can to facilitate that sort of investment.
Hockey has finished speaking. He got a bit green-fingered at one point, which politicians often do in times of economic downturns, constantly seeing the green shoots opf recovery. Suggesting a nurturing budget next week, rather than last year’s scythe, he said:
There are many green shoots in the Australian economy. This interest rate cut is going to help to facilitate those green shoots. In fact, to carry on the metaphor, it’s about as much as putting fertiliser on the green shoots as anything else. The economic objectives of the Reserve Bank are totally in sync with what the government will hand down in the Budget next week.
He’s telling business to go and invest and create more jobs.
Hockey speaks
Joe Hockey is speaking in Canberra now...
Mortgage savings
So what does the rate cut mean for mortgage holders (deposit holders? Yeah, sorry, you’re stuffed).
Assuming a full cut of 25 basis points, and a 25 year loan, if your mortgage is:
$200,000 you’ll save $29.90 a month
$300,000 you’ll save $44.84 a month
$400,000 you’ll save $59.79 a month
$500,000 you’ll save $74.74 a month
So it is some significant savings.
But to put them in some real context, prior to the RBA beginning to cut rates in November 2011, the average mortgage rate was 7.8%. For a $300,000 mortgage that meant a monthly payment of $2,276 for a 25 year loan. At 5.4% the monthly repayment would be just $1,824 a month – a $452 a month difference.
That is some serious money.
Dollar spikes
Well if the RBA wanted the rate cut to lower the value of the dollar it has rather failed. The good folk plugging away at their computers buying and selling foreign exchange have now pushed the value of the dollar to US$0.790!
So much for “all other things being equal”.
So is the RBA worried about the Sydney housing market? Yes but not enough to stop it from cutting.
Stevens said:
Low interest rates are acting to support borrowing and spending, and credit is recording moderate growth overall, with stronger lending to businesses of late. Growth in lending to the housing market has been steady over recent months.
His statement looked at the Sydney market and noted that “dwelling prices continue to rise strongly in Sydney” but it argues that “trends have been more varied in a number of other cities”.
In effect it has decided it is not the Reserve Bank of Sydney.
With the standard variable mortgage rate at 5.65%, if banks pass on the full 25 basis points, that would take it to 5.4%.
The last time the average standard mortgage rate was that low was August 1968:
And demonstrating once again that foreign exchange traders need to dial down their intake of stimulants, the value of the dollar has in the past 15 minutes gone from $US0.7850 to $US0.780 and then up to US$0.7890, to now be around $US0.7880.
A lot of bouncing around for not much of a change.
The bank appears to believe next week’s budget will not be providing much if any stimulus to the economy. It noted that “public spending is also scheduled to be subdued”.
It also noted that “the economy is therefore likely to be operating with a degree of spare capacity for some time yet”.
That’s about as blunt as a central bank gets to saying to the government, “gee how about giving us a hand?”
The main reason for the rate cut given at the end of the statement was that “the inflation outlook provided the opportunity for monetary policy to be eased further, so as to reinforce recent encouraging trends in household demand”.
This mention of “household demand” refers to the “improved trends in household demand over the past six months and stronger growth in employment”.
But the RBA notes that “looking ahead, the key drag on private demand is likely to be weakness in business capital expenditure in both the mining and non-mining sectors over the coming year”.
Without any help coming from the fiscal side, the RBA has clearly decided to once again use monetary policy to keep the economy going.
And so we are in the bizarre world of interest rates at 2.0%.
Immediately the value of the dollar dropped half a cent from US$0.785 to $US$0.780, before bouncing back to US$0.7815.
The RBA statement doesn’t give away many reasons as to why it cut rates today and not last month.
For example the paragraph on the value of the dollar states:
The Australian dollar has declined noticeably against a rising US dollar over the past year, though less so against a basket of currencies. Further depreciation seems both likely and necessary, particularly given the significant declines in key commodity prices.
Last month the paragraph was:
The Australian dollar has declined noticeably against a rising US dollar over the past year, though less so against a basket of currencies. Further depreciation seems likely, particularly given the significant declines in key commodity prices. A lower exchange rate is likely to be needed to achieve balanced growth in the economy.
So it actually took out the sentence relating to the need for the value of the dollar to be lower, and yet it still cut the rates!
The RBA statement says:
At its meeting today, the Board decided to lower the cash rate by 25 basis points to 2.0 per cent, effective 6 May 2015.
It's a cut!
Rates cut to 2%.
Updated
Ok we’re nearly there. Let’s settle in, start hitting “refresh” on the RBA’s website and see what the wizards from Martin Place deliver.
Still on the savers issue, last week the RBA governor Glenn Stevens said in a speech that:
There is another conversation, however, that tends to take place at a lower volume, but which definitely needs to be had. That conversation is about what all this means for the retirement income system over the longer run. The key question is: how will an adequate flow of income be generated for the retired community in the future, in a world in which long-term nominal returns on low-risk assets are so low?
He was noting the low rate of return for holders of term deposits. The average rate for a 6 month term deposit of at least $10,000 is now just 2.35%. You can get better for “special” deals – closer to 2.65%. But at 2.35% the real return is just 0.05% – effectively nothing.
And given the 10 year average real return up till the GFC hit was 1.35% you can understand why Stevens suggests life will be tougher for those retiring now compared to those who did 20 or 10 years ago.
But then is a 1.35% real return is a pretty sweet return for effectively zero risk – perhaps more than should be expected.
Now for some context. The current rate of 2.25% is almost fantasy world level low:
Remember that during the GFC the RBA cut rates to emergency levels of 3.0%. The difference was it was starting from a rate of 7.25% – a level so high now that contemplating it feels a bit like lunacy.
So rates are just across the board lower now than in the past. What was normal is not anymore. And they are not just low in nominal terms.
With core inflation at 2.3% the average variable mortgage interest rate is now at 3.35%. That’s not “record lows”, but it is still long way below the 10 year average of 4.46% that existed in the decade up till the GFC hit.
For savers the picture is rather bleak.
One little side issue for today’s decision will be the reaction of the market.
Now certainly if the RBA does not cut, there will be some ructions on the foreign exchange market as it has already priced in a cut (or at least a 72% chance).
But last month and in March there were some suspicious movements just prior to the 2:30pm announcement, which led some to suspect there had been a leak.
Today’s Australian Financial Review has an article featuring former RBA board member Warwick McKibbin, who argues too many people know about the decision before it is made public.
There are a lot more people who know what the bank is thinking than you would hope
he said, especially in relation to the delivery of board papers on the Friday before the Tuesday meeting.
No doubt many people – including the authorities – will be watching the markets in the seconds before the announcement to see if anything looks amiss.
The concern is if the RBA does not cut, the market will suspect the period of easing monetary policy is over and the value of the dollar may rise to around $US0.80.
Certainly the value of the dollar has a strong impact on important industries such as tourism.
Yesterday the ABS announced that short-term arrival numbers (ie tourists) grew by 7.2%:
This was down from a peak of 11% this time last year, but still remains solid. A rising dollar will put a very fast hand brake on that industry – something the RBA would not want as the economy transitions from the mining boom – especially in a mining state such as Queensland for which tourism is a vital industry.
Another issue for the RBA is the value of the Australian dollar. All other things being equal (which they never are, but let’s just indulge in some assumptions) a lower interest rate will mean a lower value dollar.
The RBA realises the rest of the world remains very much in a currency war – each country trying to keep the value of its currency down so as to help their local industries.
At the moment the dollar is around US78c – below where it was last year, but still above the US70c to $US75c that the RBA would like it to be.
In the past 12 months housing approvals growth was flat. The peak growth looks to have occurred in February 2014.
Now building approvals is a bit of a forward looking indicator as it takes a while for those approvals to turn into actual building work. So we’re still feeling the impact of that strong growth in 2013 and 2014. But if the RBA wants to keep the building of houses going – which accounts for around 49% of all buildings, then another rate cut may be the go.
Yesterday saw some interesting economic data that will have the RBA feeling a bit like sitting on the fence.
Housing is the big concern with interest rate cuts. Is the housing market on fire? Certainly in Sydney it is doing well. Last weekend saw an 89% clearance rate for auctions. That’s pretty damn hot.
But yesterday’s building approval numbers were a bit less sizzling.
Yes there was a strong 18.2% annual growth in total building approvals, but most of that comes from the rather more erratic “non-housing” sector – ie flats and apartments:
And the RBA is more concerned with “core inflation”. That’s inflation that takes out the odd factors – like the cutting of the carbon price, or a freakish drop in oil prices. On this measure inflation grew by 2.3% – well within the RBA band of joy.
And with the March quarter seeing growth of just 0.64%, even the annualised rate of 2.6% is safely in the RBA’s range. There’s no worries about inflation – though to be honest nothing either that suggests the RBA needs to cut.
But employment isn’t all the RBA cares about. Inflation is the big worry for all central banks.
Fortunately at the moment the RBA has nothing to worry about. The most recent inflation figures saw the consumer price index grow by a pathetic 1.3%. That is well below the RBA’s target band of 2% to 3%. But the reality is most of that low growth was due to the drop in petrol prices that occurred during January and February.
If we take away “transport” from the CPI figures, the annual growth is a much more normal 2.3%:
More from Greg on the jobs figures.
Total employment grew in the 12 months to March by 1.6%. That’s better than the 0.6% 12 months ago, but still well below the 2.0% generally required to get unemployment solidly coming down.
The RBA may decide it needs a kick to get it up to that level. Or it may note that the latest ANZ job advertisements data saw the 18th straight increase in trend terms. Does the labour market need a kick, or is growing fine by itself (albeit a bit slower than one might like?)
On the markets, the Australian dollar has drifted higher today despite the expectation of a rate cut. It’s currently buying US78.46c, compared with US78.32c earlier in the day. Glenn Stevens thinks it should be around US75c of course. Will it be closer to that mark by tonight?
Updated
The reason for the change of mindset of the market goes to the difficulties for the RBA today. While most expect a cut, there is enough economic good (or not too bad) news around that could mean the bank believes it could sit on its hands.
Last month’s employment numbers were surprisingly good. The seasonally adjusted rate fell to 6.1%, and full-time employment grew strongly.
I’m a little bit sceptical of the unemployment figures at the moment – last month saw a fair bit of revision. But it certainly looks as though the labour situation is better now than a year ago.
But how good is good?
First let’s look at the market expectations. They certainly have dampened somewhat since last month.
Prior to the RBA not cutting rates on 7 April, the market was not just pricing in a cut to 2.0%, but also a cut to 1.75% by August. It was even suggesting an outside chance of another cut to 1.5% by March 2016.
Now things are a bit more subdued. It still fully expects a cut to 2.0% to occur before July, but it is less confident of another cut to 1.75%.
Hello and welcome to our live blog on today’s interest rate decision. One week out from the Budget usually the talk is dominated by musings on what Joe Hockey will do next Tuesday. Today however, all eyes will be directed towards the Reserve Bank at 2:30pm when most economists and the market expect it to cut the cash rate to a record low of 2.0%.
Currently the market is pricing in a 72% chance of a cut, but a word of warning – last month the market was factoring a 75% chance. Will the RBA surprise the market for the second month in a row? Will it wait and see what Joe Hockey delivers in a week’s time? Or will the bank decide the time is ripe to give the Australian economy another little push?
Either way it will be very interesting so please stay with us as we build up to 2.30 and then for news and reaction afterwards. This is how it went last time.
