Summary
I’m closing up for the day now but here’s a summary of a dramatic afternoon.
- The RBA broke from its strategy of wait and see and instead cut rates to 2.25%
- Average mortgage rates expected to fall to a level not seen since 1968.
- RBA cites weak economic growth and higher unemployment than was previously anticipated.
- Dollar drops 1.8% from US$0.780 to US$0.765.
- ASX 200 benchmark stock index hits seven-year high.
- Joe Hockey turns the negative into a positive, suggesting that somehow how the removal of the carbon tax seven months ago caused the RBA to cut rates now.
- Only the Bank of Queensland has announced it is passing on the rate cut so far.
And that does it for today. That makes it two live blogs on interest rates decisions in 18 months for two rate cuts. Given even before today’s cut, the market was pricing in a cut to 2.0% by May or June, I suspect we won’t have to wait as long before the next one.
Thanks everyone for reading and for your comments.
Hockey tries to end on an upbeat note – indeed the entire press conference had him ignoring pretty much everything in the RBA’s statement except the part about the carbon tax.
He pleads to businesses:
The shackles are off the Australian economy. I say to Australian business, go and employ Australians. Go out there, have a go, employ more Australians because the costs of doing business are down and that is as a direct result of initiatives taken by this Government and other factors coming into play such as the cut in oil prices and obviously other factors in the economy.
At this point we should note that business confidence according to the NAB is “at its lowest level since the pre-election jump in mid 2013”.
Let us hope this does improve confidence, but it is always worth remembering that interest rate cuts generally are seen to have a 9-12 months wait before the impact really flows through the economy.
More from Joe.
Hockey is asked about his statement in 2013 and whether he still holds the view that rates are being cut “because the economy is struggling”.
Hockey replies:
No, because it’s different circumstances today. And nothing illustrates it better than the statement from the Reserve Bank where they said “The inflation recorded is the lowest increase for several years. This was effected by the sharp decline in oil prices at the end of the years and the removal of the price on carbon.
So getting rid of the carbon tax, reduces costs in the economy, it lowers inflation and it means the Reserve Bank can move to lower interest rates.
That’s a pretty specious argument. The RBA isn’t cutting rates because of the removal of the carbon tax, it’s cutting them because it expects “that output growth will probably remain a little below trend for somewhat longer, and the rate of unemployment peak a little higher, than earlier expected” and that “the economy is likely to be operating with a degree of spare capacity for some time yet”.
Joe Hockey might ponder why if the removal of the carbon tax has been so important, that same cut of the carbon tax hasn’t caused the RBA to believe economic growth will be improved.
Hockey again.
The end of the carbon tax apparently was a reason for the fall in inflation, according to Hockey. He argues that
The abolition of the carbon tax, $550 a year of a saving for every day households has been recognised by the Reserve Bank in their statement as one of the contributors to this decision. Because by removing the price on carbon, by getting rid of the carbon tax, we have got electricity prices to come down, we’ve taken upward pressure on inflation out of the equation and we are actually now giving people real relief in their household bills.
The RBA did indeed mention carbon tax.
It said that the “CPI recorded the lowest increase for several years in 2014. This was affected by the sharp decline in oil prices at the end of the year and the removal of the price on carbon”.
It wasn’t saying this was a good or bad thing, merely explaining why inflation was been so low – and that it clearly was a one off. The important thing for inflation as far as the RBA cars is what is coming. Here there is less good news for Hockey, as the lower inflation is mostly due to lower labour costs due the amount of spare capacity in the labour market
ASX 200 at seven-year high
ASX 200 looking unstoppable this afternoon. Now gone above 5,700. Currently at a seven-year high of 5,712.
Joe Hockey media conference
Joe Hockey is now speaking. It’s all good!
“The Reserve Bank today cut interest rates by 25 basis points or a quarter of 1%. This is good news for Australian families and it’s good news for Australian business. It’s good news for jobs. It’s good news for households.
So has the government had any role? Why yes
The government is working hard to take pressure off interest rates by keeping inflation low. That’s what we’ve been focused on. Fixing up the challenges of the budget and reducing the upward pressure on inflation and that’s come to bear with lower interest rates.”
Actually the main reason inflation has fallen recently is the massive fall in oil prices. I doubt Hockey can really claim credit for that.
Westpac and the Commonwealth Bank say their interest rates are “under review”.
Re the dollar, make that US76.5c.
Summary ... so far
- RBS cuts the cash rate to 2.25%
- The dollar takes a dive to US77c
- The ASX 200 spikes up more than 1%
- Bank of Queensland passes on the cut
- Government borrowing costs at all-time low
What does this mean for your mortgage?
Well for a $300,000 mortgage over 25 years it mean about a cut of about $45 a month, for a $500,000 mortgage you’re looking at paying about $76 less a month. If you have a $700,000 one, you;re going to save about $106 a month.
Here’s that stock market spike.
Joe Hockey will be giving a press conference in 10 minutes. Am guessing it will involve talk of “challenges” and why he is “more determined than ever” to press forward with “reform”.
Australian bond rates are at an all-time low.
The benchmark 10-year bond rate has plunged to 2.4% for the first time.
Lots of reaction to the rate cut, which though well signposted in many ways, still feels pretty dramatic after 18 months of steadiness.
Bank of Queensland cuts its lending rate
The Bank of Queensland looks to be the first of the mark. It has announced it will pass on the full rate cut.
So now Joe Hockey and Tony Abbott can state truly that they have interest rates at record lows. But I doubt they’ll be crowing about this.
It suggests a weak economy – and economy in need of more stimulus. One slight positive for them is that it takes a small bit of pressure off them to increase the deficit to provide the economy with fiscal stimulus as the RBA is already stimulating the economy for them.
Joe Hockey has actually been fairly sensible about applying the fiscal breaks. He wants to get back to surplus, but he really isn’t in much of a rush. I doubt this will make him any more eager. If he cuts hard it will look like he is putting on the breaks while the RBA is hitting the accelerator.
In the past the RBA has been concerned about the housing market getting too hot due to investors entering the market and forcing up house prices.
Now it is less worried about that – or perhaps more worried about other aspects of the economy. It notes that:
Credit growth picked up to moderate rates in 2014, with stronger growth in lending to investors in housing assets. Dwelling prices have continued to rise strongly in Sydney, though trends have been more varied in a number of other cities over recent months.
It notes as well that the RBA is dipping its toe into the macroprudential tools side – whereby things such as limits to leverage will be applied in order to reduce the level of loans being given for speculative house buying.
The statement says:
The Bank is working with other regulators to assess and contain economic risks that may arise from the housing market”.
With rates now at record lows – and mortgage rates at 46-year lows – the impact on housing prices will be watched very closely.
Stock market spikes
The equities market loves the rate cut. As expected investors have piled into the Australian market, sending the ASX 200 soaring towards a six-year high.
On the domestic front, the RBA has also taken a more gloomy line.
It states that
“In Australia the available information suggests that growth is continuing at a below-trend pace, with domestic demand growth overall quite weak. As a result, the unemployment rate has gradually moved higher over the past year.
This compares with December when it was suggesting that
In Australia, most data are consistent with moderate growth in the economy.”
It considered the impact of falling petrol prices, but suggested that “at the same time the decline in the terms of trade is reducing income growth”.
This adds up to an overall assessment of the economy from the RBA that “output growth will probably remain a little below trend for somewhat longer, and the rate of unemployment peak a little higher, than earlier expected”.
It concluded on the domestic economy by saying that:
The economy is likely to be operating with a degree of spare capacity for some time yet.
That’s RBA speak for saying more unemployed and more factories and businesses not being fully utilised.
Cheery.
This was more pessimistic than in its December statement which said:
The US economy continues to strengthen, but the euro area and Japan have both seen weakness recently.
It’s clear international matters have played a role in this decision.
The RBA noted that:
The US economy continued to strengthen, but the euro area and Japanese economies were both weaker than expected. Forecasts for global growth in 2015 envisage continued moderate growth.
Dollar down sharply.
The decision has seen the value of the Australian dollar fall from $US0.78 to US$0.77.
Governor's statement
In its decision the governor of the RBA, Glenn Stevens said
For the past year and a half, the cash rate has been stable, as the Board has taken time to assess the effects of the substantial easing in policy that had already been put in place and monitored developments in Australia and abroad. At today’s meeting, taking into account the flow of recent information and updated forecasts, the Board judged that, on balance, a further reduction in the cash rate was appropriate. This action is expected to add some further support to demand, so as to foster sustainable growth and inflation outcomes consistent with the target.”
Rates cuts to 2.25%
The shackles have been loosened on Australia plc.
The question of course is would a rate cut do any good anyway? Aren’t rates so low that cutting them anymore is just flogging a horse which seems rather on the dead side?
When you look at the real cash rate – ie the cash rate minus inflation it would appear to be so:
For the past 18 months the real cash rate has been around 0%. This would imply there is no room to move, but when we look at the real mortgage rates and the real small business over draft rates, we see there’s still a bit of room for rates to fall:
The average mortgage rate is now around 3.7% above the inflation rate, the small business overdraft loan is at 6.75% in real terms – actually higher than it was for most of the 2000s up to the GFC.
The picture for depositors is less joyful. They’re now getting a return of just 1% in real terms – well below what they took for granted getting for most of the past decade.
OK almost there. Time to grab a coffee and wait to see what the RBA does.
The dollar is pretty flat at around US78c – as you might expect. Expect it to move back up if Glenn Stevens and his colleagues don’t go for the cut.
A bit of history.
If the RBA was to cut rates and were the banks to pass on the whole amount (which is likely) it would see the average variable mortgage rate fall to 5.7%.
The last time variable rates were that low is so long ago, The Beatles had yet to release The White Album:
The reality is the interest rate picture is vastly different now than in the past. What was once emergency levels is now above average, and what were once average would now be considered so high as to kill off the economy.
Since 1990, the RBA has kept the cash rate steady for 12 months or more eight times,. Prior to this last period, the lowest rate in which the RBA has decided to keep things steady was 4.75%:
What is considered “neutral interest” rates where the impact on growth and inflation is minimal has clearly lowered.
Politics of cutting
The politics of any interest rate cut is always interesting. Remember the old days of “interest rates will always be lower under a Liberal government”. Given the cash rate is 2.75% points lower now than when the Howard government was making such claim, it all seems a bit quaint.
But not to worry, Tony Abbott is still on the case. In yesterday’s National Press Club speech he said that “Reducing the deficit means that interest rates will stay lower.” And yet here we are just a couple months after the government revealed the deficit for this year was $10bn larger than expected in last year’s May Budget we’re talking about cutting rates.
The last time rates were cut, Joe Hockey was the shadow treasurer. He didn’t see the cut in a very good light.
I suspect today Joe Hockey is hoping the RBA keeps rates steady. He will say it is a sign of the bank’s confidence in the government’s handling of the economy. If they cut, he will need to explain why we are now beyond, beyond emergency levels.
The stock market opened strongly this morning as money continues to flood into defensive stocks such as the banks ahead of a possible rate cut.
Investors took the ASX 200 to within 13 points of the six-year high it touched in August (5,679 points). But it has tailed off a bit since then as the focus switches to the day’s main event. Currently sitting at 5,639.
The case against
So if that sounds clear cut why do some think rates should (and will) stay put at 2.5%
First off, geez, why so much gloom? Sure unemployment is high, but employment growth hasn’t been too bad. Employment grew by 1.4% in 2014, much better than the 0.7% in 2013:
And what’s this about worrying our dollar might go high? Have you seen our dollar recently?
A year ago we were getting around US$0.90 for our dollar; now it’s around US$0.77 – that’s a 14% drop in value, and a boom for our export industries – especially the tourism sector. Yes, partly it is low because the market thinks a rate cut is coming, but it is also because over the past 12 months the market has twigged that the value of our exports like iron ore have fallen drastically.
Robert Gottliebsen in today’s Business Spectator actually predicted a chance it will fall “below $US0.60”. The RBA doesn’t need to cut to keep the exchange rate low, that’s happening anyway.
The final point is that the rest of the world is a low interest rates place. Last month Canada surprisingly cut its official rates, the European Central bank is printing trillions of dollars worth of money to effectively cut its own rates:
We need to cut our rates, the argument goes, or watch our dollar rise.
What’s more, low interest rates are also supposed to spur building growth, and yet, the latest building approvals figures out today show that growth peaked a year ago:
In December 2013 annual growth of private sector building approvals was 27.6%; now it is 1.6%.
On other measures, things are even less rosy. Car sales have been weak for over a year, with lower interest rates doing little to spur consumer confidence:
The case for a cut
So what are the arguments for a rate cut? Well, have you seen our economy lately?
The September GDP figures were bloody dreadful. Annual growth of just 2.7%, and worse, the quarterly growth a mere 0.3%. The June and September quarters saw just 0.8% growth – which annualises at just 1.6%. If we were to have such low growth, the unemployment rate would be expected to rise another 0.5 percentage points.
Speaking of unemployment, when the RBA set the cash rate at 2.5%, the unemployment rate was 5.7% - now it’s 6.2%:
So why is there a sense the RBA may cut rates today?
There are a couple reasons – economic and whispers. The economic reasons are to do with the weak growth generally throughout the economy. The whispers are mostly to do with News Corp’s Terry McCrann who last week was making the call that the RBA will cut rates. His views had the smell of a leak from within the RBA.
The feeling that the RBA might cut rates has been around for a while. In mid-January, the market was pricing in around an 18% chance they might be cut today, but the belief was it would more likely happen later – at least by May or June:
By the start of last week the odds had risen to around 34%. But by the end of the week, after the relatively weak inflation figures and the growing whispers, the market was factoring it in as a 67% chance.
It’s one of those rare times when the market really doesn’t have a strong fix one way or the other. I think it is a true line-ball call. I wouldn’t be surprised if they cut. Equally, there is enough reason for them to stay pat.
Hello. For the first time in a year and a half there is a chance that rates will be cut.
We have now had the cash rate at 2.5% for 18 months. The longest such pause was the 19 months from December 1994 to Jun 1997. For most of the past 18 months there has been little expectation of any change in interest rates. The first Tuesday of each month has become a non-event, with people barely bothered to note that the RBA had decided once again to keep rates steady.
It says something about the stability of interest rates that every statement issued by the Governor of the RBA last year on the “monetary policy decision” ended with the sentence “On present indications, the most prudent course is likely to be a period of stability in interest rates.”
Hello and welcome to our live blog on the Reserve Bank of Australia’s announcement on interest rates. The decision comes at 2.30pm but before then Greg Jericho will be looking at what’s happening in the markets, the pros and cons of cutting rates and what experts and economists have been saying about the issue.
Greg will be along in a minute but before then here’s some light reading to get into the zone.
Grogonomics: the RBA’s first move is likely to be a cut in rates
Stephen Koukoulas: the Coalition is ignoring Australia’s economic problems
