RBA holds at 2.5% - the rate that stops the nation

Tue, 04 Nov 2014  |  

The RBA is surprisingly blind to economic trends, domestically, globally and in commodity markets. Well, that is, if they actually believe the material in the statement today that accompanied the decision to leave official interest rates unchanged at 2.5 per cent. It has failed to see clear trends in the data and has missed a chance to use further interest rate reductions to underpin economic growth.

Let look at a few trends and what the RBA said.

Inflation low and falling – underlying inflation back to middle of target.

Wages growth falling to record lows and public sector wage increases will drag aggregate wages growth to levels never before recorded in Australia. RBA says: "Growth in wages is expected to remain relatively modest over the period ahead".

No change in employment for six months, despite the working age age population (those aged 15 and over) rising 170,000. The unemployment rate at a decade high of 6.2 per cent. RBA says: "Although some forward indicators of employment have been firming this year, the labour market has a degree of spare capacity and it will probably be some time yet before unemployment declines consistently."

Retail sales so-so, with a rise in September a bright note after a half year run of soft activity. The number of dwelling building approvals is falling and in trend terms has fell every month in the first half of 2014 with no growth since. RBA says: nothing.

Export values are in free fall, down a staggering 10 per cent since the start of the year with the over-valued Aussie dollar and plunging commodity prices smashing export returns. Looking at commodity prices and the price is grim. Iron ore, gold, coal, oil, among others are at or near 5 year lows, a sure sign that global economic activity is unpleasantly weak, despite the better news from the US. RBA says: "the Australian dollar remains above most estimates of its fundamental value, particularly given the further declines in key commodity prices in recent months. It is offering less assistance than would normally be expected in achieving balanced growth in the economy". 

The RBA adds: "China's growth has generally been in line with policymakers' objectives, though weakening property markets there present a challenge in the near term. Commodity prices in historical terms remain high, but some of those important to Australia have declined further in recent months." Huh? Japanese GDP is at a historical higher, just that it hasn't grown for many years. It's about growth.

To be sure, the 2.5 per cent is somewhat stimulatory and house prices in Sydney are rising too rapidly but with Japan, the Eurozone, the US, Canada, the UK and others engaging in extraordinarily stimulatory monetary policy, the 2.5 per cent looks like Mont Blanc – too high. RBA says: "Monetary policy is appropriately configured to foster sustainable growth in demand and inflation outcomes consistent with the target. On present indications, the most prudent course is likely to be a period of stability in interest rates". 

It is not clear what it will take for the RBA to see the light – maybe a sub 2 per cent readings for inflation and wages or a 6.5 per cent unemployment rate? One thing seems certain and that is the economy is underperforming, it needs a tonic. Fiscal policy is being targetted at returning to budget surplus and is not helping growth all that much so interest rates need to be lowered to start the nation up again.

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2019-20 budget will be 'problematic': here's why

Wed, 20 Feb 2019

This article first appeared on the Yahoo Finance website at this link: https://au.finance.yahoo.com/news/2019-20-budget-will-problematic-heres-194957605.html 


2019-20 budget will be 'problematic': here's why

Word has it that the framing of the budget, due to be handed down by Treasurer Josh Frydenberg the day after April fools day (and around 6 weeks before the election), is more problematic than usual.

Problematic because there is some mixed news on the economy that will threaten the current forecast of a return to budget surplus in 2019-20.

Housing has gone into near free-fall, both in terms of prices and new dwelling approvals. This is bad news for GDP growth.  The unexpected severity of the housing slump is the key point that will see Treasury revise its forecasts for GDP growth, inflation and wages lower when the budget is handed down.

It will be impossible for Treasury to ignore the recent run of hard data, including the weakness in consumer spending and a generally downbeat tone in the recent economic news when it sets the economic parameters that will underpin its estimates of tax revenue and government spending and therefore whether the budget is in surplus or deficit.

This is the main driver for a cash rate CUT, and it'll happen soon

Wed, 13 Feb 2019

This article first appeared on the Yahoo Finance website at this link: https://au.finance.yahoo.com/news/main-driver-cash-rate-cut-itll-happen-soon-200635247.html 


This is the main driver for a cash rate CUT, and it'll happen soon

The prospect that interest rates will be lowered within the next few months is already starting to impact on the economy.

Here’s how.

Around the middle of 2018, financial markets were expecting the RBA to hike official interest rates to 1.75 or 2 per cent over the course of the next 18 months or so. If proof was needed that investors and economists can get it wrong, markets are now pricing in official interest rates to be cut towards 1 per cent over the next 18 months.

The about face has been driven by a raft of disappointing news on the economy, most notably the fall in house prices, the free-fall in new dwelling building approvals and a slump in retail spending growth.

Business confidence has also taken a hit and job advertisements have been falling for eight straight months. Ongoing low inflation and increasing signs of a slowdown in the global economy have simply added to the case for this dramatic change in market pricing.