The Reserve Bank of Australia responds to lower house prices

by Shaun Richards

The economic world has been shifting its center of gravity eastwards for a while now as countries like India and China grow in both population and economic terms. However as we look towards the Orient we have been seeing some both familiar but troubling developments as 2019 has progressed. For example on April 4th I looked at what was the second interest-rate cut made by the Reserve Bank of India this year. This morning has seen the arrival of the Australian interest-rate cavalry as we see more such moves in the East.

At its meeting today, the Board decided to lower the cash rate by 25 basis points to 1.25 per cent. The Board took this decision to support employment growth and provide greater confidence that inflation will be consistent with the medium-term target. ( Reserve Bank of Australia or RBA)

Regular readers will not be surprised as on April 2nd I warned about the money supply situation.

 If we look ahead and use the narrow money measures that have proved to be such a good indicator elsewhere we see that the narrow money measure M1 actually fell in the period December to February……… Thus the outlook for the domestic economy remains weak and could get weaker.

This is another theme of the credit crunch era as central banks respond to events rather than anticipating them. They have often been given a free pass on this but the RBA is in timing terms way off the pace as the money supply has been slowing for a while.

RBA

If we look at the statement we can see what was behind this morning’s move. First what is Australian for johnny foreigner?

Growth in international trade remains weak and the increased uncertainty is affecting investment intentions in a number of countries.

That has become a central banking standard which means that it is a zero sum game as we all blame each other.

Something else that has become familiar is rhetoric that makes you wonder why they have cut interest-rates at all? And in fact would fit better with a rise in them.

The central scenario remains for the Australian economy to grow by around 2¾ per cent in 2019 and 2020. This outlook is supported by increased investment in infrastructure and a pick-up in activity in the resources sector, partly in response to an increase in the prices of Australia’s exports……..Employment growth has been strong over the past year, labour force participation has been increasing, the vacancy rate remains high and there are reports of skills shortages in some areas.

This is even odder as we remind ourselves that so many central bankers are telling us that economies have a speed limit of 1.5% annual economic growth these days. So Australia is cutting interest-rates because it is going to exceed it which is bizarre. Perhaps it is time for Mariah Carey.

Sweet fantasy (sweet sweet)
In my fantasy
Sweet fantasy
Sweet, sweet fantasy

Later we get something else of concern which is that we are being led to believe that this is to enhance a boom rather than help with a slowing.

Today’s decision to lower the cash rate will help make further inroads into the spare capacity in the economy. It will assist with faster progress in reducing unemployment and achieve more assured progress towards the inflation target.

House Prices

The reality is that like so often the central bankers are in fact worried by the housing market.

The adjustment in established housing markets is continuing, after the earlier large run-up in prices in some cities.

Note that they discuss falls as an “adjustment” and try to keep attention on the “large run-up”. But even they have to make some sort of admittal.

Conditions remain soft, although in some markets the rate of price decline has slowed and auction clearance rates have increased. Growth in housing credit has also stabilised recently…….. Mortgage rates remain low and there is strong competition for borrowers of high credit quality.

As ever these statements reveal the most with their omissions. For example housing credit must have dropped for it to be described as “stabilised” and “strong competition” for high credit borrowers means that there no longer is for lower credit borrowers. Oh and the plan is for mortgage rates to get lower.

Mortgage Rates

If we pursue the lower mortgage rates argument our theme of lower bond yields in 2019 is also in play. The RBA put it like this.

Long-term bond yields and risk premiums are low. In Australia, long-term bond yields are at historically low levels.

If we look at what has been happening we find ourselves shouting timber! This is because the Aussie bond market has surged so much that the ten-year yield has dropped from 2.75% in early November last year to 1.5% today. So if you have been long Aussie bonds well done. But as you can see there is a large push downwards for fixed-rate mortgage costs.

Commodity Prices

These continue to support the Australian economy as yesterday’s RBA update makes clear.

Preliminary estimates for May indicate that the index increased by 0.5 per cent (on a monthly average basis) in SDR terms, after increasing by 2.7 per cent in April (revised)………Over the past year, the index has increased by 12.6 per cent in SDR terms, led by higher iron ore, LNG and, beef and veal prices. The index has increased by 18.3 per cent in Australian dollar terms.

Money Supply

This has worked well as an indicator and there was some better news in April as the narrow measure grew by 2.9 billion Aussie Dollars and returned to annual growth in seasonally adjusted terms of 1.4%. So we learn that the RBA does not seem to place much weight on these numbers as it has ignored a period where there have been falls and cut rates when maybe it looks a bit better.

From our point of view the indicator has worked well and suggests continued slow growth rather than any collapse so Australia looks like it will avoid a recession, although after a quarterly growth reading of 0.2% at the end of 2018 it may get tight. But we need to stick to the broad sweep as I note the specific numbers keep being revised.

Comment

You are probably wondering what house prices are so let me hand you over to this from news.com.au yesterday.

The monthly report card from data firm CoreLogic showed the drop in national dwelling values slowed from 0.5 per cent to 0.4 per cent in May, primarily driven by a slower rate of decline in Sydney and Melbourne……….National property prices have slid 7.3 per cent nationally over the past 12 months, including homes in the major capital cities dropping by 8.4 per cent in value.

I have spared you the rhetoric from the vested interests as we note that these are the sort of falls to concentrate the mind of any central banker. But as we recall this we see that the establishment is operating in a range of areas to limit the decline.

This, combined with the Australian Prudential Regulation Authority easing access to finance will stimulate the sector.

Next comes the issue of being the South China Territories at a time of a trade war where the trolling is being stepped up. From @LiveSquawk.

China Warns Citizens Of Possible Harassment By US law Enforcement Bodies – China State Media

So far the commodity prices that are of Australian interest have not been affected indeed the reverse as we noted above. So there is a clear risk here which is maybe why I note this just being reported.

RBA’s Lowe: It Is Not Unreasonable To Expect A Lower Cash Rate

The deeper problem is that in line with what used to be called the liquidity trap interest-rate cuts at these levels have not helped other much and may in fact have made things worse.

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