The RBA has changed its tune. Look out.
Rates are going to get cheaper.
That was the key take-away from a speech from the RBA Governor Phil Lowe last week, which I’ve seen at least one commentator describe as “the most dovish speech ever.”
(If you’re new to the lexicon, dovish means inclined to rate cuts, hawkish means inclined to rate hikes.)
So yeah, it seems pretty clear to me that the RBA will cut rates a fraction lower at their November meeting, they’ll extend the TFF (cheap money for banks), and maybe even try and crunch the longer end of the yield curve.
That is, our super cheap money is about to get even cheaper.
But I’ll talk more about that, but there were a few interesting things in his speech I wanted to pull out.
First, I noted last week that the Covid crisis is having a disproportionately strong impact on small and medium sized businesses.
The RBA actually has clear data on that, which shows the huge hit to SME revenue, while big business has largely sailed through the crisis unscathed, and then saw a big bounce in sales once the money started flowing into the system.
(I’m sure they’re going to hand back all the money they took in Jobkeeper. That’s totally going to happen.)
The other thing ol Phil noted was that even though incomes are holding up, households have bunkered. Consumption has tanked and savings have spiked to the highest level on record.
As he notes, the really interesting question is what they do with all that money once the crisis passes. Might make for a nice deposit on a house, for example.
He also notes that part of that saving spree is heading in to mortgage and offset accounts, as people pay down debt.
And he also notes that even though our government debt has exploded, it’s still pretty small in the scheme of things.
So, we can be relaxed about that.
And we can be extra relaxed about it because the RBA is just buying up all the debt anyway, as their balance sheet doubles:
But the key take-aways were around the direction of monetary policy.
First up, they now reckon that more rate cuts could be useful:
When the pandemic was at its worst and there were severe restrictions on activity we judged that there was little to be gained from further monetary easing. The solutions to the problems the country faced lay elsewhere. As the economy opens up, though, it is reasonable to expect that further monetary easing would get more traction than was the case earlier.
They’re also pretty relaxed about the potential for super-cheap money to create asset-bubbles.
A second issue is the possible effect of further monetary easing on financial stability and longer-term macroeconomic stability. This is an issue that we have paid close attention to in the past when we were considering reducing interest rates in a relatively robust economic environment… To the extent that an easing of monetary policy helps people get jobs it will help private sector balance sheets and lessen the number of problem loans. In so doing, it can reduce financial stability risks.
That is, we don’t mind inflating house prices, so long as people have jobs.
So that’s why it’s a super-dovish speech.
The economy is still struggling. More rate cuts will be useful. We don’t care if asset prices inflate.
Let’s get this party started!