The RBA holds on to an on hold position

Tue, 02 Dec 2014  |  

The penny still has not dropped at the RBA. A weaker than expected world economy, a commodity price dump and persistently soft domestic demand are an economic problem for Australia but the RBA is reckoning that "monetary policy is appropriately configured to foster sustainable growth in demand and inflation outcomes consistent with the target".

I don't agree, but let's have a look at how the RBA is getting things wrong.

The Statement from the RBA released today that accompanied the on-hold decision noted the following points (my comments are in the square brackets in bold):

"Growth in the global economy is continuing at a moderate pace." [Yes – and this is not good for Australia]

"key commodity prices have declined significantly in recent months, reflecting somewhat softer demand and, more importantly, increased supply." [Yes – and this is not good for Australia]

"In Australia, most data are consistent with moderate growth in the economy. Resources sector investment spending is starting to decline significantly" [Yes – but this is not good news for jobs]

"the Bank still expects growth to be a little below trend for the next several quarters." [Yes – this is not good news for jobs]

"the unemployment rate has edged higher. The labour market has a degree of spare capacity and it will probably be some time yet before unemployment declines consistently" [It sounds like there is not enough stimulus to the economy to reverse this undesirable economic outlook]

"the Australian dollar remains above most estimates of its fundamental value, particularly given the significant declines in key commodity prices in recent months. A lower exchange rate is likely to be needed to achieve balanced growth in the economy." [This has got to be a headwind for the economy if no other action is taken]

As I have been banging on about for at least three months now, the RBA needs to cut and cut more than 25 basis points. I remain confident that the RBA will indeed cut the cash rate to around 1.5 per cent during 2015 as it works to tackle disinflationary pressures from a persistently subdued economy. This is a scenario where the Australian dollar is likely to continue to fall, perhaps quite sharply and 0.7500 or thereabout would be no surprise for this time next year, but nor would 0.7000 for that matter.

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Change of view on interest rates

Fri, 24 May 2019

Having been the only economist to correctly anticipate an interest rate cut from the RBA when close to 50bps of interest rate hikes were priced in to the market last year (See Bloomberg 17 August 2018), I have agonised over the exact months the cuts would be delivered and then how many rate cuts would be needed to reflate the economy.

Recently, I was of the view that the RBA would need to cut 100bps from now, to a level of 0.5%, but I did so with relatively low confidence. This is why I recommended all clients to close their long interest rate positions on 17 April 2019 (when the implied yields were 1.10% for the mid 2020 OIS; 1.35% on 3 year yields and the Aussie dollar was just over 0.7000 at the time).

Like in most good trades that were massively in the money, I left a little money on the table while I reassessed the outlook.

Since calling for interest rate cuts from the RBA, a lot of water has passed under the bridge, especially in the last few weeks.

Events mean I am changing my view on interest rates and have been placing / will be looking to implement new trades.

Watch out Australia: There's a flood of dismal economic news on the horizon

Wed, 01 May 2019

This article first appeared on the Yahoo Finance website at this link:


Watch out Australia: There's a flood of dismal economic news on the horizon

The Australian economy is in trouble and Scott Morrison and the Liberal Party government need to come clean and acknowledge this and outline a framework how this period of economic funk is to be addressed if they win the 18 May election.

The Liberal Party is campaigning in the election on a “strong economy” and being “good economic managers”, bold claims that fly in the face of the latest score card for the economy.

That scorecard shows a flood of what is, frankly, disappointing or even dismal economic news. Australia is going through a very rare recession in per capita GDP terms and last week saw data showing zero inflation in the March quarter. Contribution to these indictors of economic funk is the fact that well over half a trillion dollars of householder wealth has been destroyed as house prices have tumbled.

Add to that the fact reported by the Australian Office of Financial management last week that gross government debt is $543 billion, almost double the level that the Coalition government inherited in September 2013, and the scorecard is looking very ratty indeed.

As the ad man used to say, “but wait, there’s more”.