The RBA cuts interest rates again. How low will they go?

Thu, 04 Jul 2019  |  

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 

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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.

The concern, according to Lowe, remains weak household consumption and softness in housing markets, even though, as he noted, there are “tentative signs that [house] prices are now stabilising”. Perhaps most importantly, at least for considerations of monetary policy, Lowe noted “subdued” inflation pressures, a recent rise in the unemployment rate and the need to make “further inroads into spare capacity in the economy”.

This is the crux of what the current stance of monetary policy is trying to address. These economic circumstances were broadly in place about a year ago, when the RBA should have cut interest rates to current levels, a move which would have supported activity in 2019.

It is well documented that in 2018 the RBA was starry-eyed about the economic outlook as well as using monetary policy to act as a brake on house prices and household debt. It also was of the view that steady interest rates were a sign of financial stability, even as economic conditions faltered.

These errors and misjudgments have cost tens of thousands of jobs, with the unemployment rate rising, underlying inflation hitting record lows and annual wages growth stalling at a little above 2%.

The RBA is now playing catch up.

Whether the RBA has done enough with a 1.0% cash rate to kickstart the economy to the point where wages growth and inflation pick up to more comfortable levels is not yet clear. A lot will depend on factors outside its control including tax policy and other possible pro-growth measures from the Morrison government, what happens in the global economy and, in particular, whether the recent strength in commodity prices and the terms of trade can be sustained.

Also important will be the housing cycle for both prices and new construction. As Lowe noted, there are indeed tentative signs that house prices are close to stabilising after nearly two years of decline. Very favourable affordability suggests price growth is likely over the next few years, aided by the current level of interest rates. If this turns out to be the case, consumer spending will no longer be constrained by the weight of falling wealth. Auction clearance rates in Sydney and Melbourne are back at levels consistent with moderate house price gains.

New dwelling construction remains a problem with building approvals still in sharp decline. This will see dwelling investment undermine economic growth through to the middle of 2020, but with strong population growth and the absence of any oversupply of dwellings, there is a limit, which is near, to how far dwelling construction can fall.

Lowe is correct when he says that the economy is registering solid export growth, the terms of trade are buoyant, the business investment outlook is improving and government infrastructure and other spending are strong. All of which presents some support for the economy over the remainder of 2019 into 2020.

For now the interest rate futures market is pricing in a further 25 basis point interest rate cut by the end of 2019, a move that would take official interest rates to 0.75%. Whether this is delivered by the RBA will critically depend on the impact of the stimulus from the two most recent interest rate cuts, the soon to be legislated cuts in income taxes and the impact of global conditions on domestic activity.

 

 

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THE LATEST FROM THE KOUK

The RBA has the tools to fix the economy, but is reluctant to use them

Thu, 05 Dec 2019

This article first appeared on the Yahoo Finance web site at this link: https://au.finance.yahoo.com/news/rba-tools-reluctant-042742904.html

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The RBA has the tools to fix the economy, but is reluctant to use them

The Reserve Bank of Australia has made a range of serious policy errors over the past few years, and the Australian economy is weaker because of those mistakes and misjudgments.

Not only is the RBA on track to miss its inflation target for six years, and perhaps longer, the persistently high unemployment rate in concert with record low wages growth is the result of the RBA’s tardiness in cutting interest rates because of its textbook obsession with house prices and household debt.

It is a mistake that has cost the economy tens of billions of dollars in lost output; employment is many thousands of people below what could have been achieved; and all the while wages growth hovers near record lows undermining the wellbeing of the workforce. What’s worse, the RBA seems to have thrown in the towel on trying to meet its inflation target, even though that target was confirmed a month ago in the recent update of the Conduct of Monetary Policy between the RBA and Treasurer.

In this context, Deputy Governor of the RBA, Guy Debelle, gave a fascinating speech earlier this week on the topic of employment and wages.

Household wealth is booming: What this means

Mon, 25 Nov 2019

This article first appeared on the Yahoo website at this link: https://au.finance.yahoo.com/news/household-wealth-booming-200022930.html 

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Household wealth is booming: What this means

$500,000,000,000.

In other words, half a trillion dollars.

That is approximately the amount Australian household wealth has increased since the start of July 2019, with house prices surging, the Australian stock market moving higher, and savings increasing.

The bulk of the gains have occurred via rising house prices, which according to CoreLogic, are up over 5 per cent in less than five months. This move in house prices has added around $360 billion to the value of housing and is driving the rebound in wealth. At the same time, the level of the ASX has risen by around 2 per cent with a further $40 billion being paid out in dividends. This allows for the recent pull back on prices as new banking scandals are exposed.

In these conditions of rising wealth, the household sector is getting a serious financial reprieve, despite the ongoing weakness in wages and the still very high level of unemployment and underemployment which afflicts almost 14 per cent of the workforce.

The good news is that this wealth creation is likely to spark a rise in household spending growth once the gains are widely acknowledged in the community and then feed into consumer sentiment. This is most likely to show up in the first half of 2020, after the usual lags work their way through the economy. History shows that when we consumers experience growth in our wealth, we are more inclined to lift our spending.

Earlier this year, RBA researchers Diego May, Gabriela Nodari and Daniel Rees found that:

“When wealth increases, Australian households consume more. Spending on durable goods, like motor vehicles, and discretionary goods, such as recreation, appears to be most responsive to changes in household wealth”.

We saw this, in the reverse, in the period from the middle of 2017 to the middle of 2019 when Australia-wide house prices fell by 10 per cent, crunching wealth levels. It was no surprise that during this period, household spending growth slumped. The retail sales component fell to its weakest since the early 1990s recession. Consumer spending and confidence was not helped by the coincident weakness in wages growth and the policy mistake of the RBA which refused to cut official interest rates, even though the economy was mired in a low inflation, low growth and falling wealth climate.

Thankfully, common sense has since prevailed at the RBA and it has cut interest rates three times since June.

Demand for housing has also lifted with shrewd first home buyers taking advantage of favourable affordability and investors also stepping back in after the May election saw the return of the Coalition government and the demise of Labor’s proposal to reform negative gearing tax laws. The current wealth surge unfolding now is occurring at a time when there is also a sharp decline in the debt-servicing burden as interest rates fall. This has the dual effect of freeing up cash flows for some consumers and allows other to accelerate their debt repayment.

For the moment, the labour market remains weak and wages are still stuck in the mud. These will constrain any near term lift in household spending, but the wealth lift will be vital for sparking a pick-up in consumption, probably in the new year when the effect is more widely observed and entrenched.

It adds to the scenario where 2020 is looking like a better year for the economy with bottom line GDP growth set to hit 3 per cent in the second half of the year.  If the wealth effects build further over that time and business investment and infrastructure spending continues to lift, the economy in 2020 just might register its strongest growth rate in a decade.