Relax, I just wanted to get your attention… Now that I’ve got it, let’s have a grown-up discussion as to exactly what’s going to happen to interest rates in the next 12-24 months…
If you’re an investor, you need to read this… If you’re not an investor, sorry, you’re at the wrong place.
Like the government, the RBA is trying to talk the economy down, but their eyes are squarely on the exchange rate. It’s a game of cat and mouse, but shows you that rate hikes are completely off the table until the AUD falls a lot further.
Through all the budget hoo-ha, which had very little of interest for property investors, the RBA has been keeping a low profile.
With the government all out to whip up a sense of budget emergency, the RBA has been careful not to go ‘off message’. It left rates unchanged for eight months in a row, but its public statements remain sombre.
In fact, surprisingly, if not suspiciously so.
Take for example the growth forecasts in the latest quarterly statement on monetary policy. At the moment, they’ve got growth slowing through the second half of 2014 and into 2015.
BUT – they had to revise UP their forecasts for the year to 2013/14 financial year. There wasn’t much they could do about this, after the stronger than expected print for GDP in the December quarter last year, and what we already know about the March quarter of this year.
So, to put it in perspective, we’ve got growth of about 0.8 percent a quarter this year, slowing to around 0.6 percent a quarter in the year after. So after ramping it up a bit this year, the economy shifts down a gear the year after.
It’s left a lot of folks scratching their heads. The outlook is surprisingly downbeat given what’s being going on in the economy lately. There’s been a clear lift in momentum in recent times. The household sector’s looking stronger, and the employment data have consistently surprised on the upside in recent months. There’s also a mini-boom emerging in housing construction, which is always welcome news.
(The impact a budget full of big cuts could have on dragging down growth is a real prospect, but doesn’t rate a mention…)
The only explanation the bank gives for cutting its outlook for 2014/15 is a 4% increase in the Aussie dollar since February. But even then, it’s starting to look like old news when you start thinking about FY14/15.
Still, the RBA has put the dollar front and centre again. It’s sending a very clear message about how sensitive the Aussie outlook is to the fortunes of the currency.
But RBA “jawboning” has also become a bit confused in recent times. The “I’ve got a gun and I’m not afraid to use it” rhetoric we saw at the end of last year is gone and all we got in this SMP was, “with resource prices expected to decline further, historical relationships suggest that the exchange rate could move lower over time.”
What a wet piece of lettuce.
So what’s going on? Is the RBA forcing their forecasts down so as not to offend Canberra, or should we really be worried about the outlook ahead? And have they stopped holding out for further falls in the dollar? And where does that leave interest rates?
I reckon what we’re seeing is a more nuanced approach to “managing expectations” in the market.
Last year, when Glenn subtly hinted that sometimes central banks do intervene to help their currencies down, and theoretically, he just might do exactly that one day, he would have been very well aware of what affect that had.
Markets barely battered an eyelid. There was a bit of a shock on the day, but beyond that, diddly squat. And why would the markets care? The RBA is small-fry compared to the banks of China and Japan, who are very actively manipulating their currencies.
And currency markets themselves are wild, untamed behemoths. No one has pockets deep enough to take them on in any serious way, even the RBA.
Jawboning Mark I: FAIL.
And so enter jawboning Mark II. In this version, the RBA tries to shift the consensus around what the longer-term outlook for the Australian economy is. If they can convince people that Australia is facing several years of below-trend growth, especially if the outlook for the US is improving at the same time, then that should take some pressure off the dollar.
Because the price of the currency today keys off expectations of the future. If there’s an expectation that the US assets of the future will perform better than the Aussie assets of the future, demand will swing around from Aussies to USDs, and the Aussie dollar should fall.
And with a government selling economic calamity, it’s the perfect time to do exactly that. Mime along with the words from the government’s hymn sheet, and hope that markets shift their views.
But the RBA doesn’t have a choice. Interest rates are sidelined for the moment. They’re already at record lows, and pushing them down even further risks driving property prices through the roof.
It also leaves you very little room to move in case of a genuine emergency.
But so long as the dollar remains expensive, it will weigh like an anchor on the sectors of the economy you want to get kicking. Growth will be unbalanced, with some sectors charging along, but others getting left behind.
The RBA has made it very clear it wants to see the AUD with an eight in front of it. And until the AUD goes to the lower end of US80 cents, you can forget about rate hikes.
Until it gets what it wants, talking the Aussie economy down is about all it can do. The only question is how many of us will see through the subterfuge.