This morning eyes turned to a land down under to see what the Reserve Bank of Australia would do. It will have been no great surprise to regular readers as this hit the newswires.
At its meeting today, the Board decided to lower the cash rate by 25 basis points to 1.00 per cent. This follows a similar reduction at the Board’s June meeting.
There are a lot of perspectives here but let me start with the point that it is getting ever harder to find any country with any sort of positive interest-rate. Even Australia with an economy cushioned by its enormous commodity resources cannot escape the trend to ever lower interest-rates that looks ever more like this.
Glaciers melting in the dead of night
And the superstars sucked into the super massive
Super massive black hole
Super massive black hole
Super massive black hole ( Muse)
There was a time that Australia was able to stand apart from this trend due to its ability to essentially dig money out of the ground. Actually if we take a look at The West Australian we can see that in fact this continues to boom.
Australia’s commodity exports earned a record $275 billion over the past 12 months, and another record is tipped next year.
Officials are scrambling to adjust their forecasts to account for the unexpected boom, with high iron ore prices driving the strong figures.
So a setback here was not the cause of the double cut in interest-rates and in case you are wondering why Iron Ore prices are booming as the world economy slows it has been caused by this.
The impact of the tailings dam collapse at one of Vale’s iron ore mines in Brazil this year, which led to a sharp fall in Brazilian iron ore exports, looks set to last at least two years.
This means that the situation in this area is not only rosy for Australia but looks set to be so.
It means the seaborne iron ore market is likely to remain tight, and prices elevated, at least until 2021, and Australia is the main beneficiary.
Official forecasts for resource and energy commodity earnings in 2019-20 have now been revised up by $12.9 billion to $285 billion, which would be another record.
What does the RBA say?
As we find so often the statement accompanying the announcement is somewhat contradictory. Let me show with this.
This easing of monetary policy will support employment growth and provide greater confidence that inflation will be consistent with the medium-term target.
But why does employment need supporting when later we are told this?
Employment growth has continued to be strong. Labour force participation is at a record level, the vacancy rate remains high and there are reports of skills shortages in some areas.
But wait there is more.
The strong employment growth over the past year or so has led to a pick-up in wages growth in the private sector, although overall wages growth remains low. A further gradual lift in wages growth is still expected and this would be a welcome development.
Back in the day central banks explained interest-rate increases like this! The situation gets even more bizarre as we note this.
Taken together, these labour market outcomes suggest that the Australian economy can sustain lower rates of unemployment and underemployment.
If we look at the latest data from Australia Statistics we are told this.
Employment increased 28,400 to 12,856,600 persons
It’s chart shows us that this has risen from just over 11.5 million five years ago. Over the same period the unemployment rate has fallen from 5.9% to 5.2%.
Why did they cut then?
On a superficial level there is a case from the inflation target. Here are the inflation numbers from Australia Statistics.
was flat (0.0%) this quarter, compared with a rise of 0.5% in the December quarter 2018……rose 1.3% over the twelve months to the March quarter 2019, compared with a rise of 1.8% over the twelve months to the December quarter 2018.
Except if they push it higher to 2% then as “overall wages growth remains low” they will reduce real wages and make things worse for the ordinary person. Unless of course the wages fairy turns up and we have learnt that he or she has been in rather short supply in the credit crunch era.
However there is this from the RBA.
Conditions in most housing markets remain soft, although there are some tentative signs that prices are now stabilising in Sydney and Melbourne. Growth in housing credit has also stabilised recently.
This is typical central banker speak as we note they invariably avoid any mention of pries falling or declining so we get euphemisms like “soft” and “stabilised”. The subject is obviously too painful for them. If we look at the situation then Australia Statistics gave us some insight on Thursday.
Residential real estate experienced its fifth consecutive quarter of real holding losses.
This has led to this.
The ratio of mortgage debt to residential real estate assets was 29.0, up from 28.1 in the previous quarter, indicating that mortgage debt grew faster than the value of residential real estate owned by households. The rise reflects falling residential property prices rather than strong growth in mortgage debt.
If we switch to the latest house price data then you can see for yourselves about the claimed tentative stabilisation in Sydney and Melbourne.
All capital cities recorded falls in property prices in the March quarter 2019, with the larger property markets of Sydney (-3.9 per cent) and Melbourne (-3.8 per cent) continuing to observe the largest falls……..Through the year growth in property prices fell 10.3 per cent in Sydney and 9.4 per cent in Melbourne. Adelaide (0.8 per cent) and Hobart (4.6 per cent) are the only capital cities recording positive through the year growth.
As to the RBA it will have mixed views on this from the Sydney Morning Herald.
The National Australia Bank, Commonwealth Bank of Australia and Westpac will not pass on the full benefit of the latest Reserve Bank interest rate cut to all of their home loan customers.
In response to the Reserve Bank’s move to cut the cash rate from 1.25 per cent to 1 per cent on Tuesday, NAB said it would cut all of its variable home loan interest rates by 0.19 percentage points.
On the one hand not all the easing is flowing into mortgage-rates but on the other thee rest will help “The Precious”.
There are two main issues here. The first is that as Australia cuts its interest-rates to a record low it is joining a trend and theme which just builds and builds. Perhaps the maddest example of this has popped up this morning.
Italy 2 year yield falls below 0% ( @mhewson_CMC )
So being the South China Territories has bought some time but appears to have only delayed the inevitable. The catch is that if it did any real good the places that preceded Australia on this road to nowhere would have recovered by now, but they just look to cut further. Whereas I would be mulling the response of the ordinary person as highlighted by the Sydney Morning Herald.
“Two months in a row to have a drop like that, it’s just fuelling the uncertainty,” Mr Chapman said.
“It just scares me we’re going down the same road as the global financial crisis, which means chaos. And if I see chaos on the radar, I want to have enough money behind me to see me through.
If other people think that then we see a mechanism which makes things worse and not better. A case I have been making for some years now. However the Governor feels the need to hint at even more.
Given the circumstances, the Board is prepared to adjust interest rates again if needed.
Odd that as in the speech he has just given in Darwin you could think that the economy is in fact going rather well.
Second, Australia’s terms of trade have risen again, largely due to higher iron ore prices. Investment in the resources sector is also expected to increase over the next few years…..Third, the exchange rate has depreciated over the past couple of years and, on a trade-weighted basis, is at the bottom end of its range of recent times…..And fourth, we are expecting stronger growth in household disposable income over the next couple of years,
The next issue is one of timing as we were on the case last September 4th.
So there has been a clear credit crunch down under which of course is related to the housing market changes. This is further reinforced by the narrower measure M1 which has stagnated so far in 2018. Much more of that and the RBA could either cut interest-rates further or introduce some credit easing of the Funding for Lending Scheme style.
So what have they been doing for the last ten months? This is even worse when we remind ourselves that monetary policy is supposed to lead not lag events. As we see so often they seem to have leapt from complacency to panic.
As it happens the situation with M1 growth is the same one of stagnation or around 0.1% higher than a year ago. Thus I doubt this rate cut is the last and still think a Funding for Lending Scheme or something similar is on its way.