This article was written on 26 August 2019: It was on the Yahoo Finance website at this link https://au.finance.yahoo.com/news/rba-cut-interest-rates-september-033400092.html
The RBA should cut interest rates next week
The board of the Reserve Bank of Australia meets next week and the smart money is betting it will not cut interest rates.
What’s more, the market is anticipating the RBA will not only hold the line this time and probably also in October, but will cut rates at the November Board meeting. This will be after what is expected to be a weak inflation result in late October and perhaps 50 basis points or more of interest rates cuts from the US Federal Reserve in coming months.
By November, the rise in the unemployment rate is likely to be further entrenched which will make the case for lower interest rates a certainty. This may well turn out to be the case, but the scenario outlined above begs a question, why should the RBA wait to give the economy a much needed boost?
No reason to hold off
In other words, why not cut interest rates next week when everyone and their dog knows the economy is currently weak, when inflation is testing record lows and the labour market is starting to deteriorate. Add to this the unfolding dislocation to global trade and economic growth, courtesy of US President Donald Trump and his irresponsible escalation of tariff wars, and there seems no sensible reason for the RBA to hold off cutting interest rates to help guard against these negative influences.
With the RBA mandate to target annual inflation at between 2 and 3 per cent in concert with full employment, if the RBA was to cut 50 basis points next week would it threaten to blow the inflation and full employment targets out of the water?
This article was written on 20 August 2019: It was on the Yahoo Finance website at this link: https://au.finance.yahoo.com/news/mortgage-rates-set-to-fall-to-new-recordlows-210011407.html
New record lows ahead: Your mortgage rate could be slashed further
Fancy a mortgage rate of 3 per cent? Maybe a little less?
Within the next few months, mortgage interest rates are on track to fall to fresh record lows, probably below 3 per cent.
That is the overwhelming message to come from the Reserve Bank as it struggles to deal with the soft economy where inflation is tracking at record lows, a long way from returning to the 2 to 3 per cent target range.
While the totality of these interest rate cuts are unlikely to be fully passed on to mortgage holders, strong competition within the mortgage market will see mortgage rates fall from current levels around 3.5 per cent down below 3 per cent. This is a stunningly low borrowing cost for those buying a house.
It also means that housing affordability in much of Australia will be at its best level in many decades.
How much could you save on your mortgage?
This article first appeared on the Yahoo Finance website at this link: https://au.finance.yahoo.com/news/rba-interest-rates-government-can-stimulate-economy-but-wont-210050650.html
“Bitterly disappointing”: We are seeing a once in a generation policy failure
Imagine having the power to promote economic growth, lower the unemployment rate and set in train the conditions to boost real wages growth and inflation?
It would be immensely satisfying to change policies to improve the living standards and quality of life for every day, hard-working Australians and their families.
Next imagine a harsh reality where economic growth is weak and slowing, the unemployment rate is rising and wages growth and inflation well below a satisfactory level, and you choose not to wield the power reverse these uncomfortable circumstances?
Doing nothing, unwilling to pump some much needed cash into the economy because of a political dogma wedded to a notion that budget surpluses are good and that holding interest rates unnecessarily high so you might dampen demand for houses – which is seen as a problem - and household debt overwhelms your power to make things better.
This article first appeared on the Yahoo website at this link: https://au.finance.yahoo.com/news/did-the-rb-as-monetary-policy-put-our-economy-at-risk-033940907.html
The RBA admits it stuffed things up – sort of
The Reserve Bank of Australia needs to be congratulated for publishing research which implicitly confirms that it made a mistake when setting monetary policy in the period mid-2017 to early 2019.
Not that the research explicitly says that, but the RBA Discussion Paper, Cost-benefit Analysis of Leaning Against the Wind, written by Trent Saunders and Peter Tulip, makes the powerful conclusion that by keeping monetary policy tighter in order to “lean against” the risk of a financial crisis, there was a cost to the economy that is three to eight times larger than the benefit of minimising the risk of such a crisis eventuating.
The costs to the economy includes lower GDP growth and higher unemployment, that lasts for at least for several years.
A few terms first.
According to the Saunders/Tulip research, “leaning against the wind”, a term widely used in central banking, is “the policy of setting interest rates higher than a narrow interpretation of a central bank’s macroeconomic objectives would warrant due to concerns about financial instability”. In the RBA’s case, the “narrow interpretation” of the RBA’s objectives are the 2 to 3 per cent inflation target and full employment.
In the context of the period since 2017 and despite the RBA consistently undershooting its inflation target and with labour underutilisation significantly above the level consistent with full employment, the RBA steadfastly refused to ease monetary policy (cut official interest rates) because it considered higher interest rate settings were appropriate to “lean against” house price growth and elevated levels of household debt.
This article first appeared on the Yahoo Finance web site at this link: https://au.finance.yahoo.com/news/just-how-weak-australia-strong-economy-213520159.html
The weak economy is turning higher
In the space of a couple of months, the rhetoric on the economy has gone from strong to weak.
Curiously, both assessments are wrong.
The economy was actually weak during the first half of 2019 and, if the leading indicators are correct, late 2019 and 2020 should see a decent pick up in economic activity.
It is not clear what has caused this error of judgment and the about face from so many commentators and economists, including importantly the Reserve Bank. A level-headed, unbiased look at economic data confirms that in late 2018 and the first half of 2019, the economy was in trouble. There were three straight quarters of falling GDP per capita, house prices were diving at an alarming rate, there was a rise in unemployment, wages growth remained tepid and low inflation persisted.
These are not the dynamics of a “strong” economy.
Only now, in the rear view mirror look at the economy, are these poor indicators gaining favour, leading to generalised economic gloom.
This article first appeared on the Yahoo Finance website at this link: https://au.finance.yahoo.com/news/australia-needs-fiscal-stimulus-but-what-does-that-actually-mean-203000918.html
Australia needs ‘fiscal stimulus', but what does that actually mean?
With the economy down in the dumps and the per capita recession now extending to nine months, there is a frenzied call for the government to implement some spending and tax policies to stem the bleeding.
The calls are coming from economists, journalists, the RBA Governor and a bevy of commentators who are demanding a fiscal policy boost from the government to support economic growth. This is all fine and there is a strong case for policy makers to work together to do something to lift the pace of economic expansion.
But there is a problem with the generic “fiscal policy stimulus” demand given that none of the calls have been accompanied by even vague details of what the stimulus means and the areas of spending that should be ramped up or what taxes should be changed.
Sure, there is a suggestion of more spending on ‘infrastructure’ but that is never defined or specified.
This article first appeared on The Guardian website at this link: https://www.theguardian.com/commentisfree/2019/jul/02/the-rba-cuts-interest-rates-again-how-low-will-they-go
The RBA cuts interest rates again. How low will they go?
It’s better late than never.
The Reserve Bank of Australia has cut interest rates for the 14th time in this elongated monetary policy easing cycle that began way back in November 2011.
The official cash rate is at a fresh record low of 1.0%, and there is a better than even chance rates will go even lower in the months ahead. The economy is negotiating an increasingly entrenched period of moribund growth. This is seeing interlinked problems of chronically low inflation and subdued wages growth, both of which are unlikely to materially improve until the annual rate of GDP growth picks up to at least 3% for a couple of years.
The latest annual GDP growth rate is just 1.8%, which is a long way from where it needs to be.
With the latest interest rate cut, the RBA governor, Philip Lowe, mentioned a few positive points for the economy, which suggests it will likely pause for a few months before seriously considering further interest rate moves.
In particular, Lowe noted “the outlook for the global economy remains reasonable”, which is shorthand for a broadly neutral influence from overseas to Australia in the near term. This looks a fair assessment. Lowe also pointed out that infrastructure spending is increasing and that investment in the resources sector is picking up in line with strength in exports. Again, these positive factors are evident in the recent national accounts.
This article first appeared on the Yahoo Finance website at this link: https://au.finance.yahoo.com/news/its-time-end-strong-economy-propaganda-230414837.html
It’s time to end the “strong economy” propaganda
For the last year or so, it has been obvious to anyone with an open mind that the economy is in trouble. Unfortunately, the government and the Reserve Bank not only ignored this growth slump, but they ran a propaganda campaign saying the economy was “strong”, that unemployment would keep falling and wages growth was poised to pick up.
It might have been politics that lead the RBA and Treasury to this view with the recent election swinging on the economic credentials of both major parties. Ahead of the election, the RBA and Treasury were loathe to undermine the government with an honest assessment of the rapidly spreading economic problems.
It is possible that the forecasts were a simple error, which sometimes happens when an external shock hits the economy.
Either way, things are so bad in the economy right now that forecasters are rushing to out-do each other on how low interest rates will go in this cycle. Some are canvassing negative interest rates, printing money or the need for a fiscal policy boost if the economy remains in its economic funk.
Time will tell.
The range of forecasts that where regularly produced by the government (Treasury) and the RBA up until very recently were unambiguously optimistic. The forecasts ignored all hard data on the economy, which suggests it may have been a political strategy to remain upbeat, rather than it being a clumsy forecasting error.
This article first appeared on the Yahoo Finance website at this link: https://au.finance.yahoo.com/news/house-prices-are-still-dropping-but-bottom-sight-210000929.html
An update on my house price bet with Tony Locantro
It is difficult to think of a bigger issue that gets Australians fired up than house prices.Regular readers will know that back in September 2018, I made a bet on house prices with Tony Locantro, a fired-up Investment Manager with Alto Capital in Perth.
Tony wont mind me saying this, but he is what is called an ‘uber bear’ on house prices – he reckons prices are grossly inflated and are overdue to collapse. On the other hand, I reckon there is a cycle and that after the surge up to 2017, house price falls were inevitable, but that the decline would last only a couple of years and would not be too severe.
The bet was framed around a peak-to-trough fall in prices of 35.0 per cent in either Sydney, Melbourne or the 8 capital cities measure used by the Australian Bureau of Statistics. If prices fell by more than 35 per cent at any stage from the peak until the end of 2021, Tony would win, if the fall was less than 35 per cent, I would win.
That background is important because the ABS just released the official dwelling price data for the March quarter 2019.
In the quarter, dwelling prices fell 3.0 per cent in the 8 capital cities and dropped 3.9 per cent in Sydney and 3.8 per cent in Melbourne.