The RBA is worried about the coming boom getting out of hand
The RBA is playing a dangerous game. So is the government. Won’t somebody think of the children?
Now, you’d have to think that today’s RBA board meeting is live. There’s every chance we could see another rate cut. Nothing has changed the view of most people in the market that rate cuts are heading lower.
We’re already at record lows. Soon, we’ll be at recorder lows. People think we’ll soon get to from where we are now – 1.25%, to 0.5% – a rate most people think is the floor.
(Our economy is too small to go to zero, apparently).
That’s the scenario that is currently priced into the markets:
But the RBA’s not happy about this. It doesn’t want to run out of ammo. And it feels like it’s being backed into a corner
… by Josh Frydenberg.
That’s because Treasurer Frydenberg says he’s committed to delivering a budget surplus.
That’s what good economic management looks like right? You make lots of money, and spend less than you earn.
Well, maybe if you were a little old lady living in a shoe, sure. Good work, Granny.
But it’s a different story if you’re the government. You’ve got keep your eye on the bigger picture.
If the economy’s tanking, being blindly committed to a surplus actually makes things worse.
In a recession, when the private sector is shrinking, you kind of want the public sector to be take up some of that slack – not cutting spending into the down turn.
In recession, there’s a good argument for the government to expand spending.
But we’re not in recession, yet.
But why is the RBA cutting? Why do people think that official rates are going to 0.5% – the recordest levels possible?
Because we’re tipping towards recession.
And even though the RBA is being backed into a dangerous corner – where they’ve got no ammo to deal with a crisis – Frydenberg wants his surplus.
Which to my perspective looks like scuttling the heaviest cruiser in your armada just for a short term bump in your popularity ratings.
(Which is as much as I expect of politicians, really.)
The RBA is growing increasingly frustrated with the situation. And you’re starting to see that frustration bubbling to surface.
Last week, Governor Phil Lowe was trying to scare the government into action.
Last week, he said, “We can be confident that lower interest rates will push up asset prices, and I think that later on we will have problems because of that.”
You need to see through the boring world of bank-speak to see how strong a statement this is.
“If we keep cutting rates, asset prices and house prices are going to boom. Are you sure you want that?”
And is he right? Will house prices boom on the back of rate cuts?
Duh. Of course they will.
Look at auction clearance rates.
They’re well and truly back to boom time levels.
So yes, rate cuts will see house prices boom.
The RBA is trying to scare the government. The government is determined to have its surplus.
It’s a game of chicken. Who’s going to blink first?
I reckon we’ll know the answer on the first Tuesday of October – the next time the RBA meets.