I’m closing the blog now but there is plenty of food for thought from the RBA decision, not least Australia’s ability or otherwise to resist global economic trends.
Craig James, chief economist at CommSec, has made a very good point about this in a note this afternoon, suggesting that super-low rates may become the norm:
While central banks in other parts of the world have been forced to reduce rates to near zero, Australia has never been in that position. But these are extraordinary times with technology, “disruption” and an environment of conservatism driving global inflation rates lower. The Reserve Bank may be uncomfortable with interest rates at current super-low levels, but these are unusual times. It may end up that interest rates of 1-2 per cent become the norm rather than the exception.
With inflation low and likely to remain low, the Reserve Bank can attempt to run the economy at a faster rate by cutting interest rates. The aim is to boost spending, employment and investment with the stronger demand lifting the inflation rate back into the 2-3% target band.
But there are no guarantees that lower rates will indeed boost economic growth and inflation. That doesn’t mean that you give up trying. Central banks need to do everything in their power to stimulate growth and prevent super-low inflation rates being sustained. And certainly do everything to prevent deflation (falling prices) from taking hold.
That seems a suitably apt point at which to call it a day.
You can read a full story on the day’s dramatic developments here. Thanks for reading:
SUMMARY
A dramatic day for the markets in Australia. Here’s a a summary of the main points:
- The RBA has cut the cash rate to 1.5% from 1.75%, a new record low
- Governor Glenn Stevens said low inflation meant the board had to act
- The risk of a housing market bubble had “diminished”, giving further justification for a cut
- The Aussie dollar fell sharply to US75.06c but quickly recovered the losses
- ASX/S&P200 fared worse, rising slightly before dropping 0.7% in volatile trade
- Commonwealth Bank has passed 0.13% of the cut on to borrowers
- 10-year bond yields have fallen to a record low of 1.83%
#Australia cash rate at record low#AUDUSD slips 1/2 cent
— Divya Chowdhury (@divyachowdhury) August 2, 2016
10-yr bond yield historic low#Markets imply further move, #RBA offers no guidance
That #RBA rate cut appears to have wrong-footed many hedge funds, @NettyIsmail reports https://t.co/Y6juf7LEc1
— Asia Hedge Brief (@asiahedgebrief) August 2, 2016
When I bought the one and only house I have owned interest rates were at record highs. Now they are at record lows #RBA
— Darryl Snow (@lapuntadelfin) August 2, 2016
Chris Weston at IG reckons the RBA has “thrown caution to the wind” with its analysis of the housing market.
Basically, Chris argues, the policy makers don’t think lower rates are going to make any difference to the house prices any more:
The Reserve Bank have effectively thrown caution to the wind, respecting their mandate for price stability, amid diminishing negative effects from lower interest rates.
One noticeable issue here is the lack of concern lower rates are likely to have on the housing market, with even a hint of concern around the apartment market. It seems we may have reached an inflection point where the consumer is just not enthused about where borrowing rates are and this is something incoming RBA governor Philip Lowe has been arguing in recent times.
Updated
More reaction flooding in.
David Bassanese of BetaShares reckons it’s basically good news. This is his view:
The Reserve Bank’s decision to cut interest today was in line with my long-hold expectation that the cash rate would fall to 1.5%.
The good news for the economy, however, is that it has been much lower-than-expected inflation – rather than weaker-than-expected economic growth – that drove the RBA’s latest decision.
And more tweets:
#RBA cuts 25bp to 1.5%, $AUDUSD went from 0.7540 to 0.7491 now back to c. 0.7520... Think easily over 76c by Fri mrn pic.twitter.com/qvojjUm898
— Kay Van-Petersen (@KVP_Macro) August 2, 2016
Cant remember an interest rate cut when depositors seemingly have more to cheer about than borrowers #RBA pic.twitter.com/TsyytNXTYw
— Lindsay David (@linzcom) August 2, 2016
My colleague in the Canberra bureau, Gareth Hutchens, has this observation about the RBA statement and what it says about the housing market:
The Reserve Bank believes the risk of exacerbating problems in the housing market with further interest rate cuts has diminished. It lists a number of reasons why:
- Supervisory measures have strengthened lending standards, and a number of lenders are taking “a more cautious attitude” to lending in certain segments.
- Growth in lending for housing purposes has slowed a little this year.
- The most recent information suggests that dwelling prices have been rising “only moderately” this year, with “considerable” supply of apartments scheduled to come on stream over the next couple of years, particularly in the eastern capital cities.
All this suggests that “the likelihood of lower interest rates exacerbating risks in the housing market has diminished”, it says.
Updated
Commonwealth Bank cuts mortgage rate
The biggest bank has already moved to pass on some of the rate cut to borrowers. Standard variable mortgage holders will pay 0.13% less to take their borrowing costs to 5.22%.
That’s still a fairly hefty margin for the banks though - consumer groups might hve something to say about that decision.
Our SVR mortgages to reduce by 0.13%; owner occupier rate will hit record low 5.22% from 19 August. [1/5]
— CommBank (@CommBank) August 2, 2016
Pretty soon the banks will be paying me for my home loan #RBA
— Brad Allen (@bradilz) August 2, 2016
Australian shares bounce back
ASX/S&P200 has bounced back after the RBA announcement. It climbed 30 points to nearly 5575 points but has dipped slightly again in the last few minutes as traders digest the implications of what looks like sustained low interest rates for Australia.
Updated
Bond yields extend falls
Australian bond yields – the cost of borrowing for the government – have extended their falls after the announcement.
Over to you Scott Morrison to get the cheque book out and get that new infrastructure built?
#Aussie 3-year, 10-year yields extend drop after #RBA pic.twitter.com/RfZ96VfzLM
— Yvonne Man (@YvonneManTV) August 2, 2016
Lots of reaction:
We're tracking every bank change following the #RBA rate cut https://t.co/XiYjhw7xWU
— Angus Kidman (@gusworldau) August 2, 2016
#RBA managing interest rates for the currency, cuts to historic low of 1.5%, leaving incoming Governor Lowe with as little ammo as possible.
— James Rosenberg (@bjorosenberg) August 2, 2016
Boosting growth shouldn't be left to #RBA alone - the Turnbull Govt has a slogan but not a plan
— Jim Chalmers MP (@JEChalmers) August 2, 2016
Thanks, Mr. Trump. #RBA $AUDUSD
— Khojinur Usmonov (@Khojinur30) August 2, 2016
*The issue with my latest tweets before RBA pic.twitter.com/0SewRpFmmb
RBA statement analysis
The statement by the RBA governor, Glenn Stevens, is interesting in how little it varies from the statement made last month, when there was no change to rates.
For example last month he said of the Australian economy:
In Australia, recent data suggest overall growth is continuing, despite a very large decline in business investment. Other areas of domestic demand, as well as exports, have been expanding at a pace at or above trend. Labour market indicators have been more mixed of late, but are consistent with a modest pace of expansion in employment in the near term.
This month he says:
In Australia, recent data suggest that overall growth is continuing at a moderate pace, despite a very large decline in business investment. Other areas of domestic demand, as well as exports, have been expanding at a pace at or above trend. Labour market indicators continue to be somewhat mixed, but are consistent with a modest pace of expansion in employment in the near term”.
Almost no change in wording at all. So why cut rates this month and not last month?
It would appear they were waiting for the inflation numbers, and when they came out low, the decision was made for them.
Updated
RBA blames continued low inflation
Recent data confirm that inflation remains quite low. Given very subdued growth in labour costs and very low cost pressures elsewhere in the world, this is expected to remain the case for some time.
Aussie dollar plunges
The dollar is pushing below US75c. But as Greg pointed earlier in the blog, it might not last.
IT'S A CUT!!!!
The cash rate is now an all-time low of 1.5%.
Nearly there ... just a few minutes to go before the announcement in what is also a big day for the markets in Japan. Prime minister Shinzo Abe is expected to give details on his 28 trillion yen fiscal stimulus package today (that’s around US$266bn).
The Nikkei is down around 0.7% as investors await the details but there’s also pressure on stocks from the falling price of crude oil. Overnight it entered a bear market down below $40 – a fall of a fifth since June.
But if we had a live reporter we’d now be saying “over to Martin Place now ...”
But another rate cut would encourage investment in the housing market at a time when many would suggest it doesn’t need any more encouraging – because a housing glut is on the way.
While the latest building approvals figures did show a fall, the reality is we are still building a lot of houses and apartments – yes down from the record levels a year ago, but still historically very high:
And one of the problems with this is that the major increase in apartments and other non-house dwelling in Melbourne and Sydney is that there is a very great deal of apartments that have been approved to be built but which have yet to start construction:
There certainly is no great need to encourage investors to build dwellings, the worry is that too many are already being built and are planned to be built.
One area this has an impact is rental prices. Rental prices around the nation are growing more slowly than they have for many years:
Again this is unlikely because people are reducing their demand for renting, but more an indicator of the overall weak inflation growth and the increase in supply.
The RBA may be worried that another cut might just exacerbate this, and eventually see an oversupply of apartments leading to a collapse in the prices, which would cascade on housing prices overall.
Updated
Should the RBA be cutting?
The question perhaps, given how likely it is that a rate cut will happen, isn’t if the RBA will cut rates, but whether they should.
If inflation is a symptom of strong competition and weak work prices, then a rate cut is not going to do much to improve it.
That’s not to say a rate cut won’t have an impact. Having less to pay each month in your mortgage does give people an incentive to spend more money.
More spending = more turnover = more jobs = more growth in the economy. At least that’s the theory.
Given the low rates it could also see people needing to invest more to get the same return. It also might not really have an impact in the area of housing.
Are there that many people holding out on buying a house because 5.4% isn’t low enough?
The latest building approvals figures out today showed a continued slowing of private sector approvals:
The slowing is occurring in most states – except South Australia where things are going pretty strong:
It is unlikely another rate cut would set off another housing boom, especially since housing prices have increased by 31% since December 2011, whereas wages have grown just 11% in that time:
The impact of inflation on mortgage rates is also of course a factor as well. While mortgage rates are at record lows, because inflation growth is also scraping along the bottom, that means the real rate of your mortgage is not at a record low:
It is lower than it was during the housing boom year before the GFC, but paying 3.7% above inflation on your mortgage is not stunningly low.
And because term deposits are at record lows in real terms this means that the gap between what the banks charge to lend you money and what they pay to obtain your money (term deposits are in effect you lending money to the bank) is wider than it has been for over a decade:
Basically, since August 2013, the banks have cuts term deposit rates by more than they have mortgages.
What about for savers? The cash rate also affects the interest rates banks give you for holding your money.
And not surprisingly, because the cash rate is at record lows, so too are the rates for term deposits – just 2.5% return for the “special average rate”:
What this mean in real terms is that investors are getting less than a 1% return above inflation:
Long gone are the glory days where self-funded retirees could invest in essentially risk-free term deposits and get a real return of above 2%.
So what would a rate cut mean in the real world?
Well currently the average variable mortgage rate is 5.40% – the lowest since July 1968 (top of the charts at the time in Australia was the Seekers’ Greatest Hits). The discount rate of 4.60% is lower than any rates we have on record:
But rather interestingly banks might not pass on the full cut should the RBA cut the cash rate.
The gap between the average mortgage rate and the cash rate is now larger than ever:
So while a full 25 basis points cut would reduce the fortnightly payments of a $300,000 loan at 30 years from $777.13 to $755.65, don’t spend that extra $21.50 a fortnight just yet.
Updated
'Nothing to stop RBA cutting'
A little bit more reaction on today’s poor data on the Australian economy. Building approvals and trade figures were both disappointing on the downside for the market.
Here’s CommSec economist Savanth Sebastian
A weaker set of economic results. A modest slide in the number of dwelling approvals, and a substantial rise in the trade deficit. The only positives to be taken out of the data related to the rise in the value of building approvals. Overall there is nothing in the data to stop the Reserve Bank from cutting interest rates if they deem it necessary.
Updated
Aussie dollar stubbornly high
As ever the situation of Australia’s exchange rate will be a factor. Cutting the cash rate should – all other things being equal – lead to the value of our dollar falling. This makes our exports cheaper and our imports more expensive.
But all other things, alas, are never equal.
When the RBA cut the cash rate in May, the value of our dollar was US$0.75. It fell for a bit and then rose again and now sits at ... US$0.75:
And while the price of our imports is a factor in our low inflation figures, the reality is inflation is just low everywhere.
While the prices of tradables were flat in the past year, the prices of non-tradable items grew at near record lows of just 1.6%:
One further argument in favour of the position that the supply side/strong competition is driving low inflation rather than weak demand is that the growth of prices is weak both internationally and domestically.
In the past 12 months the price of those “tradable” goods and services which have prices driven mostly on the international market – eg petrol, most foods, furniture and personal products, audio/visual equipment, motor cars and international holidays – grew not at all.
There’s not much the RBA can do about the price of wheat, oil or Ikea furniture. And weak prices overseas may be due to weak demand throughout the world for products, but that low price really doesn’t reflect the strength of demand in Australia.
Petrol prices in the past year dropped 11% and they are now back to 2009 levels:
The RBA cutting rates won’t do anything to increase petrol prices – and petrol alone accounts for 3.55% of the CPI index.
Updated
There is some conjecture that the low inflation rate is not so much an indicator of weak demand in the economy, but strong competition on the supply side.
Certainly when you look at the growth of food prices this aspect comes into play:
In the past 12 months the average prices of food and non-alcoholic beverages fell by 0.1%. Now clearly that’s not because people have reduced their demand for food and drink.
An excellent example of this is milk. It was just a given that the price of milk would go up at along the same pace as overall inflation until Coles and Woolworths embarked on their milk price war, which now sees milk costing the same as it did a decade ago, despite overall inflation being nearly 30% higher than then:
But even when we exclude food and beverages (which accounts for 16% of CPI), inflation remains very low:
Updated
Changing economic outlook
One thing the expectation for a rate cut shows us is how changed the outlook for the economy has become over the past two years.
In August 2014, the cash rate was at 2.5% and the market was expecting it to mostly stay there. Instead within a year it was cut twice to 2%.
In August last year the market though there would be a cut by now to 1.75% - so they got that right. But they expected by the end of this year things to be improving:
The story of the past two years is the market thinking inflation and economic growth will return to some sort of normality, and then later revising those expectations down.
Here’s hoping in a year’s time we are not still seeing this trend.
The big reason most expect a rate cut is that the latest inflation figures out last week showed the CPI growing annual at just 1%.
The two RBA “underlying” or “core” inflation measures were also calculated to be growing at just 1.7% for the trimmed mean and 1.3% for the weighted median – both record lows and all three measures, are well below the RBA’s target band of 2% to 3%:
Now just because inflation is outside the target band does not mean the RBA will necessarily act. That band is the aim over the cycle – so they don’t mind if it occasionally drops below or goes above.
But underlying inflation has now been below 2% since September last year, and actual CPI hasn’t been above 2% since September 2014.
It is unlikely the RBA would not look to raise rate were the situation reversed and inflation was running over 3% for nearly two years.
So if they don’t cut, it might be a sign that the RBA either doesn’t care too much about low inflation, that it’s real inflation band is more 1.5% to 3%, or that it doesn’t think a rate cut will do anything.
Expectation of cut is over 70%
Over to Greg then...
With a week to go before the Rio Olympics, forget wondering whether records will be broken. For that we need only look to Martin Place in Sydney at 2:30pm. Just three months since the RBA cut the cash rate to a record low of 1.75% we have the strong expectation that another record is to be set.
The market yesterday was rating it a 68% chance that a cut would occur:
This roughly agrees with the odd you can get on the betting sites – Sportsbet is paying $1.60 for a cut to 1.5% – which translates to a 62.5% chance. Though the future market today has pushed the likelihood up even further to around 72%.
It’s rare the bank goes against the market expectations, but even if it doesn’t happen today, the market has now fully priced in a rate cut by November.
Good afternoon and welcome to the live blog on the Reserve Bank’s latest monetary policy decision – aka interest rates decision.
Greg Jericho will be here shortly with his inimitable mix of analysis and comment but before then just a quick bit of scene-setting.
-
The market now believes there is a 76.6% chance that the RBA will cut rates again today – to a new all-time low of 1.5% (assuming just a 0.25% cut), according to CommSec. The cash rate was last cut in May to 1.75%.
- That follows worse than expected official figures on building approvals earlier today. Approvals for the construction of new homes fell 2.9% in June, which was worse than market expectations of a 0.5% rise.
- In other gloomy news, Australia’s trade deficit grew in June from $2.2bn to $3.1bn
- Shares across Asia Pacific are subdued in the run-up to the RBA decision at 2.30pm AEST.
- The Aussie is flat at around US75.35c ahead of the meeting but 10-year bond yields are at an all-time low, indicating a bearish outlook for the dollar.
Australia's 10-Yr yield below 1.85% for the first time (in forever)
— David Ingles (@DavidInglesTV) August 2, 2016
20/25 see RBA cut; swaps show 75% probability pic.twitter.com/OkBhPGaYb1
