Rate cuts over. If we have another rate cut from the Reserve Bank, then head for the hills, it will be confirmation the economy is heading for the rocks and probably nothing can stop it sliding into recession. Or it will be because there’s a financial crisis brewing somewhere in the world? Extreme? Well, just look at change in the wording of the important final paragraph of the RBA’s various post-meeting statements. First, take a look at the final paragraph of the April meeting statement:
“At today’s meeting the Board judged that it was appropriate to hold interest rates steady for the time being. Further easing of policy may be appropriate over the period ahead, in order to foster sustainable growth in demand and inflation consistent with the target. The Board will continue to assess the case for such action at forthcoming meetings.”
And now take a look at the final paragraph at the end of yesterday’s statement from Stevens:
“At today’s meeting, the Board judged that the inflation outlook provided the opportunity for monetary policy to be eased further, so as to reinforce recent encouraging trends in household demand.”
No mention of anything along the lines of “the most prudent course is likely to be a period of stability in interest rates”, as there was also in the final paragraph of numerous statements in 2014. Some economists reckon that if the dollar doesn’t fall, then the RBA will be forced back into rate-cutting mode. But somehow, going below 2% without significant help from the public sector would be a bridge too far for the RBA. Unless it thought the economy was in shoals and about to founder. — Glenn Dyer
On the money. Terry McCrann stuck his neck out and wrote in his column in the Herald Sun on the last Wednesday in January that the RBA would cut rates at the February board meeting the following Tuesday. Ahead of the March and April RBA board meetings, plenty of people made guarded and qualified predictions of rate cuts, which were wrong. But no one was as definite as Terry McCrann. Then, last Thursday evening, a story appeared on Fairfax Media’s news websites (here’s the version, as appeared in the print editions the next day). The Age’s economics editor, Peter Martin, wrote definitely that the weak economy “will force The Reserve Bank to cut interest rates on Tuesday” — a prediction that came before the dollar rebounded to 78 US cents in the forex market — and which was vindicated by yesterday’s cut in the cash rate to 2.0%. So instead of worrying about forex fiddling ahead of RBA decisions — which has been the headline-grabber for the media in the past three months — what about these two very, let’s say, “well-informed” stories? Who’s been leaking, and to what end? Have board meetings become irrelevant? — Glenn Dyer
Silly, selective Joe Hockey. The Treasurer told a media conference yesterday afternoon that the rate cut was good news for families and good news for small business — but not good news for savers, pensioners and others living on fixed interest. Joe talked about “many green shoots” in the economy. Joe, they have been there for the best part of the year and now looking rather stunted, hence the need for two rate cuts this year. But no more. If another is needed it will be a big, gloomy signal to us all that the central bank is not confident about the strength in the economy, or something nasty has been glimpsed offshore. Our Joe told his media conference the rate cut was “about putting fertiliser” on those green shoots. Of course, he was speaking in Canberra, where fertiliser is in oversupply.
Mark Kenny from Fairfax Media asked the Treasurer about lack of fiscal stimulus from government and referred to comments RBA governor Glenn Stevens had made earlier in the year when he wondered about whether monetary policy was reaching its limits of stimulus. Hockey referred to comments in Stevens’ statement yesterday, but skated over (as he now so often does when confronted by something he doesn’t like) the following comment:
“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. Public spending is also scheduled to be subdued. The economy is therefore likely to be operating with a degree of spare capacity for some time yet.”
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Mark Kenny’s question went unanswered, and that’s important because, as Stevens has made clear, fiscal policy needs to do something to help the economy, and not fiddling at the edges. — Glenn Dyer
Watch those markets. Financial markets around the world have become more febrile in the past fortnight — we’ve seen a huge sell-off in bonds in the eurozone and the US (and Australia, for that matter), which is not showing signs of slackening. Equities have become more volatile with a 4% slump in China yesterday (on fears of margin trading curbs by brokers trying to cool the boomiest boom around the globe), along with 2%-plus drops in Europe overnight. The sell-off in bonds comes despite a worsening in the situation with Greece’s finances, with another payment due to the IMF tonight and another meeting of eurozone finance ministers on Monday night (and the IMF threatening to withhold funding even if Greece puts up a list of reforms next week). At 10.45 am this morning the ASX had seen the mother of all sell-offs with the ASX 200 down more than 100 points, or 1.9%. It was the second double-digital fall of that size for the local market in a week. Weak third-quarter updates from the Commonwealth Bank and Woolworths added to the negative vibe from offshore, especially from Wall Street and bonds. — Glenn Dyer
US looking uncertain. The health of the US economy is suddenly back in the frame after a bigger-than-expected trade deficit in March — the deficit hit a six-and-a-half-year high! Economists now say there’s a solid chance the second estimate of US first-quarter GDP growth will have a negative reading when released later this month, not a rise larger than the first-reported, tiny 0.2% annual rate. All this is pushing back the estimates of when the US Fed will lift rates. Fed chair Janet Yellen speaks in the US tonight and will no doubt cop questions, and try to be circumspect. But the bond markets sell-off is telling us there are growing strains in global markets and a larger, more widespread slide wouldn’t surprise. Could that force the RBA to cut again, if any-sell off sweeps us up? — Glenn Dyer