Surprise!
Economists mostly failed to predict that the Reserve Bank of Australia would cut rates to a record low of 2.75 per cent at its monthly meeting today. Yep, lower than during the height of the financial crisis — another sign that we’re living in different times now.
Central banks like to be able to surprise, but what caught the forecasters (less so the rates markets) unaware was the cut coming after little sign of serious deterioration in the economy.
Sure, there has been little positive news but not many negative shocks either – Monday’s retail sales data, which was nowhere near as bad as painted in some sections of the media, being a case in point.
The latest housing approval statistics for March, were poor but they followed some good months and the RBA today pointed to an overall “modest firming in dwelling investment”. Property prices are also fairly robust and the RBA would presumably prefer not to make Australian housing even more expensive or end up in the same situation as its neighbour across the Tasman Sea. (New Zealand has something approaching runaway house price inflation).
Employment remains in ‘enviable’ territory, too. Nomura’s Martin Whetton earlier today described the most recent unemployment data as follows: while it missed expectations with 31,600 jobs lost in March, and unemployment rose to 5.6 per cent from 5.4 per cent, this was still “much stronger than the economic performance over the period would suggest” and for the whole quarter 50,000 net jobs were created.
Searching the statement for more signs doesn’t reveal much… China is more “sustainable” and “still robust”… Commodity prices “have moderated a little in recent months though they remain high by historical standards.”
Expectations that the mining investment boom will peak this year haven’t moved since October last year, which suggests the RBA isn’t surprised one iota when projects such as Woodside’s A$45bn Browse LNG project are put on ice.
That said, there are a key paragraphs in Governor Glenn Stevens post-meeting comments.
Here’s one:
The exchange rate, on the other hand, has been little changed at a historically high level over the past 18 months, which is unusual given the decline in export prices and interest rates during that time. Moreover, the demand for credit remains, at this point, relatively subdued.
The RBA has been talking darkly since August about the strength of the AUD relative to Australia’s terms of trade, and every month since then it has noted the AUD is remaining “higher than might have been expected”. Today’s wording was stronger. Fiddling with its own balance sheet doesn’t seem to have done much to scare off the AUD-loving central banks and SWFs. Maybe George Soros will help?
So the RBA would probably say today’s cut was been flagged as a possibility for a while now; the previous few monthly meeting statements have mentioned an “accommodative stance” and….
…. in April for example:
“The Board’s view is that with inflation likely to be consistent with the target, and with growth likely to be a little below trend over the coming year, an accommodative stance of monetary policy is appropriate.”
Then underlying inflation — reported quarterly in Australia — did come in at 2.4 per cent, just below the halfway mark for the RBA’s 2 to 3 per cent target.
The Board has previously noted that the inflation outlook would afford scope to ease further, should that be necessary to support demand. At today’s meeting the Board decided to use some of that scope.
So, doing it because they can. The RBA is still in an enviable position with plenty of rates to cut before unconventional measures get on the table.
However, JP Morgan’s Ben Jarman illustrates a more pessimistic view of today’s cut:
For example, while there is still talk of traction from low rates in today’s statement, this rings pretty hollow. The effects of low rates on the economy apparently are “continuing to emerge”, but no compelling examples are offered from the data. Consumption “has been strengthening”, but transfer payments have been playing a role here, and the consumer was never part of the growth transition narrative anyway. And the “firming in dwelling investment” has only been “modest”. The only clear impacts from low rates right now seem more financial than real (portfolio shifts etc) and haven’t done much yet to fill the growth gap as mining crests.
He has a point. Expectations for a cut in June are now building in rates markets, and signs of the non-resources industry stepping into the breach are still fairly soft.
Related links:
All you ever wanted to know about the AUD and who’s holding it – FT Alphaville