Yesterday’s rate cut really just unwinds the tightening of financial conditions we’ve seen over the past 6 months. We’re playing catch-up.
The RBA surprised a few folks with their rate cut yesterday. As I’ve written before I thought rate cuts were coming, but I didn’t think we’d see them quite so soon.
But it seems Glenn Stevens hand got forced by the unfolding political cycle. If he didn’t cut now, his next chance would have been just a few weeks before the election – and the Governor is not in the habit of dropping bombs.
After that, it’s out to August. 3 months can be a long time in economic cycles, so the RBA decided to get out on the front foot. Bravo. Lovely shot, sir.
In my mind this rate cut is backward looking. That is, the RBA’s hand has been forced by the way economic conditions have panned out. It doesn’t say so much about where we’re going, as where we are now.
And it’s a rate cut we deserve.
First up there is the inflation data. The last inflation read a few weeks ago was a bit of a shocker. It was lower than everyone was expecting, and has inflation dropping below the RBA’s target band.
And that means the RBA is missing their target. If they didn’t act, it would have raised questions about how committed they were to their target.
How’s your ticker, Glenn?
And economic data can be choppy, but deflation in the March quarter, and slower inflation over the year was broad based. You couldn’t just fob it off as some unseasonably low twinkie prices. Deflation was everywhere. It demanded action.
But really the low inflation number probably just gives Glenn the cover he needs to deliver the rate cuts he wants.
Because the reality is that financial conditions have become tougher over the past year. And its starting to put a drag on things.
Tighter financial conditions are coming from two places. First, offshore funding costs are rising. This is where the banks get a lot of their money, so the banks money is getting more expensive.
That means they either pass the costs on to us, or take a hit to profits (guess which they prefer.)
So far they’ve absorbed a fair bit of it, but some have raised rates slightly, and the smaller banks are letting it be known that funding costs are squeezing their bottom line.
It’s likely we would have seen rates keep drifting upwards through the rest of this year.
And it’s the reason why ANZ decided not to pass yesterday’s rate cut on in full. Listen to Group Executive Fred Ohlsson:
The background is that wholesale funding costs have again been rising in recent months. While we’ve absorbed this for some time and taken steps to reduce costs in our own business, higher funding costs mean we are only in a position to pass on a portion of the reduction in the cash rate to our customers.”
At the same time, the APRA restrictions that kicked in around the middle of last year have put a brake on bank lending, most pointedly on mortgage lending.
We are seeing credit growth slowing, and with that, a temporary cooling in the property market. (Temporary so long as we don’t see more restrictions.)
That also gives Glenn a bit of cover. The most common criticism you hear when the RBA cuts rate is that it’s pouring fuel on the property bubble. (Ugly metaphor I know).
Right now, with growth slowing in every capital city, and the APRA restrictions seemingly doing their job, this criticism will have less weight.
So the point is, that with increasing offshore funding costs and the APRA restrictions, we’ve actually been living in one of the tightest credit environments in recent times.
Putting them together, which is what this chart from Goldman Sachs does, we can see that financial conditions are tighter now than at any time in the past four years, including the last four rate cuts.
(This hasn’t been updated for yesterday’s cut.)
So really, the question would have been, ‘why not now?’
The RBA is just playing catch up. Yesterday’s rate cut just alleviates the tighter conditions we’ve been experiencing in recent times.
In that sense, it’s a rate cut we deserve.
My feeling is that this should help the property market in particular. The APRA restrictions have been noticeable, and they’ve shaken confidence a bit. But this rate cut will bring mortgage rates down to incredibly low levels. It should give things a spark.
However, the Aussie dollar didn’t seem to move much over night, and it’s pretty clear that the RBA would like to see a lower dollar. The dollar is one of the things making it a bit tough for the Aussie economy right now.
So I think we’ll see another rate cut. I wouldn’t expect to see it before the election, but I’ll certainly have my eye on the August meeting.
What do you think? More rate cuts on the way?
ron goddard says
hi jon,
just a question or two first up. would you rather pay $12. for a kg of beef or $5? would you rather pay $130k for a house(home) or $1m.(same property)? your answer is obvious..so why are we obsessed with inflation?
is it a con job by the government in believing that inflation is good as prices are rising all over the place.? or is it that we live an illusory life wherein as long as prices go up we are happy…especially if we buy property. well, maybe somebody is paying more than they ought to and somebody is raking in more than they should be and the government wins every time. now to your question. lower rates mean more disaster as savers get taken to the cleaners and we..sorry the banks borrow more off shore at higher rates. no winners there.
we need more rate cuts like we need another hole in the head. and it is a world wide malady. debt binges are killing economies everywhere yet ‘we’ persist with lower and lower rates and more and more cheap money borrowed. albert einstein would think that the world is run by lunatics, and you know why. oh well press on rome and britain and now america..fallen empires you understand. of course you do…but do you? we cannot foretell the future but we can use a little acumen here and there and not be blinded by self gratification by wanting more and more. it seems that humans are always hell bent on self destruction because we are smarter than the animals…really?. cheers, ron
Peter R says
Amen to all of that Ron,
It’s all financial engineering. It will end badly
Cheers
Al says
? .. ‘Confirmed*… * .. the motion is carried ..* … 3 – 0 .
Kathy says
Einstein’s definition of insanity – doing the same thing over and over and expecting a different result. Guess the world’s central bankers and politicians didn’t get that email. Sure, let’s cut interest rates again, and give yet another kick in the guts to the financially prudent and responsible, the savers and self funded retirees.
Because gee, the last dozen or so interest rate cuts haven’t worked at stimulating the economy, both here and globally (ZIRP or NIRP anybody), but THIS one will do the trick. NOT!
Why is deflation the enemy? Before last century, deflationary periods were as common as inflationary periods and a perfectly normal part of the economic cycle. It gets rid of mal investments and inefficiencies in the economy.
However, since the rise of central banks, suddenly deflation is bad and inflation is good. Why? Because it allows governments to borrow ad infinitum and they hope the debt will be inflated away.
That won’t work in a deflationary period. Welcome to the new normal.
Al says
‘ Heere’ – *here ..* … ! … so obvious .. ey … .
David says
Well done Kathy. I agree with what you say. And savers and self funded retirees – why have them. If the gov’t can get them as pensioners then they have them by the ………………and then they have them at their mercy. Why have independent individuals in your country who have no dependency on the gov’t and can think and act for themselves. Can’t have that.