The interest rate cutting cycle in Australia is over.

At least it appears to be, based not so much on hard local news, but more on an unambiguous up-turn in global economic and market conditions and the yet to be felt effects of earlier monetary policy easings from the Reserve Bank.

To that end, I think I was wrong.

The case for having the cash rate lower than the current 3 per cent is still robust, based on the low inflation environment, the high Australian dollar and a softer labour market. But all of that news has been around for a while and the Reserve Bank has shown it has other issues in its focus when setting interest rates.

Among those issues that RBA Governor Glenn Stevens mentioned in December, when he cut rates by 25 basis points, are the still high terms of trade, improving sentiment in financial markets, close to trend growth domestically, an improvement in dwelling investment and higher house prices. Since Stevens’ statement almost two months ago, the positive tone of these indicators has unambiguously lifted – in some cases by a lot.

Some of the issues that encouraged the bank to cut rates in December have either improved a little or are no worse. This is particularly so for "below average global growth”, a subdued outlook for non-residential building, a softening labour market and inflation being consistent with the target (NB: the December quarter CPI is released tomorrow).

In other words, the economic and markets news has materially improved since December, when the Reserve Bank said: "While the full effects of earlier measures are yet to be observed, the board judged at today's meeting that a further easing in the stance of monetary policy was appropriate now”.

Yesterday I outlined the unambiguous improvement in global conditions (High fives for a five-year high, January 21). This is a critical aspect in Reserve Bank thinking and will have a huge influence on its policy orientation.

In terms of the things that matter domestically, the bank will be looking at the recent lift in house prices with some trepidation. Since the end of 2012, house prices are up, according to RP Data, by a noticeable 1.3 per cent. While this rise follows two years of sluggish house price movements and is likely to have some seasonality to it, a massive improvement in affordability is likely to trigger further house price gains. While some house price rises are non-controversial, a more rapid lift in house prices would be something it would prefer to avoid. Refraining from overdoing easy monetary policy is one way to reduce the risk of this.

In addition to the global and house price news, house building approvals are trending higher, consumer sentiment is firm, share prices are strong, commodity prices have ticked higher, car sales are booming, and the mining sector still appears to be strong. And while tomorrow’s CPI is likely to confirm a low inflation rate for the December quarter, the TD-MI monthly inflation gauge has shown an uptrend in inflation in December which does not bode well for inflation in the early part of 2013.

There are some important points to make about the Australian dollar and its influence on Reserve Bank monetary policy decisions. While just about every analyst, including those at the bank, judged the Australian dollar to be overvalued in the latter months of 2012, the fact that it has been broadly stable while commodity prices have kicked higher has eroded some of this overvaluation.

Indeed, the Australian dollar overvaluation is no longer all that extreme. When the iron ore prices plumbed below $US90 a tonne nearly four months ago, the unit was trading around $US1.02 to $1.04. With iron ore prices up some 70 per cent since then, it is this morning around $US1.05 – a point which significantly dilutes the overvaluation estimates. In US dollar terms, the Reserve Bank index of commodity prices is higher now than in October, a point that again softens the Australian dollar overvaluation story.

Curiously, there are many analysts expecting aggressive interest rate cuts. Indeed, some banks have, in recent weeks, altered their monetary policy forecasts to call 75 or 100 basis points of rate cuts over the course of 2013, reversing their earlier stance of modest or no cuts in the year ahead.

According to the latest Bloomberg survey, 100 basis points of rate cuts by year end are forecast by ANZ and Macquarie, while 75 basis points of cuts are forecast by Deutsche Bank, Goldman Sachs and NAB. These forecasts may yet prove to be close to the mark, but it seems they are too pessimistic. The economy has been surprisingly robust in recent times.

There is only one forecaster surveyed by Bloomberg who reckons there will be an interest rate hike this year. The ever hawkish Paul Bloxham, HSBC’s chief economist, reckons the Reserve Bank will not only be on hold for the first three quarters of 2013, but could well hike rates during the December quarter.

Given the unfolding evidence brewing, it is hard to argue with that view.

But this far out, is very hard to pinpoint when the first hike in the cycle will be, as it could easily be nine to 12 to 18 months away. Put another way, the Reserve Bank will likely be in a hiking mode when the unemployment looks like trending back towards 5 per cent, when global conditions have the markets speculating about the end of quantitative easing and perhaps when commodity prices are 10 per cent higher than now. It won't happen overnight, but it probably will happen.

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Well Stephen, your argument is plausable and i rarely believe what the bank economists put out into the public arena as imo its just meant to get a reaction from people to get them fixing the deposits for longer periods. After all why would banks give their real opinions to the general public or are they obligued to do so? I dont think so.
The RBA uses plenty of spin and secret language talk to get the desired results and so do the banks. So on this basis you could be right, but imo busunesses need lower rates and not be scared into thinking rates will start to rise and if they do rise I would blame the ALP surplus lie (Why rates have no further to fall, January 22).
While domestic economic condition and inflation is one thing, the international conditions are another totally different beast.
The recent few years in the wake of GFC indicates that the conventional wisdom or policy prescription is no longer the best approach, not just for the big players but also for Australia.
There is no ending to the quantitative easing policies in the US, EU or Japan as the last just embarked on this path under its new government.
In such an international environment, your analysis appears completely out of kilt with what the best policy really should be based on real world cases as opposed to the inapplicable conventional thinking at the moment.
One should never be mechanical in thinking and must know the limit of a particular line of thinking and adopt the best even it may mean you have to break with the tradition.
In this occasion, you seem to have fallen into the trap that most economists do in most of the time. (Why rates have no further to fall, January 22).
While central banks print there is no need to lower rates. (Why rates have no further to fall, January 22).
This new money is free. We could even get to the point whereby a central bank pays bankers to take the new money. That is when the central bank prints, loans it to the bankers at 1% and governments borrow it from the bankers at 3% because otherwise they have to pay 5% from real savers.
So printing and lowering the cost of money creates lower margins, more risk, inflation, capital destruction and unsustainable bubbles.
Hopefully, the RBA will do nothing.
The Spectator writes:"an improvement in dwelling investment and higher house prices...".Wow, ain't it the truth: the 2013 Demographia Housing Affordability Survey came out yesterday showing Australia has 8 in the top 20 most expensive residential city property prices on the planet (Why rates have no further to fall, January 22).
The Spectator writes: "economic and markets news has materially improved since December...".That was only 3 weeks ago!
Let us remember that the cause of the western world's problems is debt, writ large. Since the start of the sub- prime crisis in the US in '06/'07, the top 6 central banks have printed $10 Tn , and all that has happened is that sovereign debt has increased and banks have been given time to get their houses in order.Politicians have done very little to change things.
From where I stand things are just getting worse, and we are just about at the stage where the person in the street is finding economists' statements incredulous.
"Improvement in house prices".... I am not sure what this means - is it an improvement for the cost of houses to go up - keeping home owners happy, or is it an improvement for house prices to return to their real economic value and thus make them more realistic investments? (Why rates have no further to fall, January 22.)
Are you playing devils advocate? (Why rates have no further to fall, January 22.)
The only reason the stock market is rising is because there is too much cash in the bank, brought about because the RBA has had rates too high for nearly a decade.
The AU$ is too high because rates are the the highest without soverign risk, the only reason they are not above $1.10US is because the market has factored in 100point falls, if the RBA dont cut in feb, bank and $1.08US within a week.
Lets see if the RBA drive the final nail in the Australia manufacturing coffin!
Stephen, look at the real base fundamentals and you will see that at the moment, unemployment will shoot to 8%, housing will be stable yet plateau, mining will come off more, a Government needs to change and a mess cleaned up (will take two years), and confidence needs to rise in the minds of the thinkers and creators of enterprise and business/industry, and generate real wealth and jobs again (Why rates have no further to fall, January 22).
The finance industry which now, seems to be the biggest industry in Australia is nothing but a virtual casino doing nothing really productive but eating into peoples savings and super funds while the finance industry gets the cash.
I remember, just before the "Recession we had to have", the finance industry and economists were talking the same message, as you are now, and then "91 arrived, what now?
It's back to basics whether we like it or not and therefore interest rates and "industrious funding" will be the driver, no matter what.
Things "out there" are really not as you say, and is unreal "Spin Stuff" at the moment!
Will be interested to see how yoru view is goign to change as there will be more unemployment (Why rates have no further to fall, January 22).
Houses are ridiculously overpriced in Oz and whoever beleives otherwise good luck.
The economy where I am standing - small exporter and distrtibutor - has not improved a bit, but I guess office and economic gaga land and reality is always different.
Stephen Nordstrom is correct and everyone seems to have forgotten that our RBA cash rate is already at the "GFC emergency level" (Why rates have no further to fall, January 22). If the RBA reduces rates any further we will be seen to be in an economic morass which won't be a good look for our current Labor minority/Green/Independent government facing an election with a huge debt around its neck.
Australia is about 5 years behind the rest of the world in economic phases (Why rates have no further to fall, January 22).
As the rest of the worlds employment figures improve ours are getting worse. Australia has too much private debt and as unemployment increases we will fall into recession.
This one will be really ugly.
Our treasury and the RBA need to get up to speed on MacroEconomics (Why rates have no further to fall, January 22).
Monetary Policy has lost its bite/use in managing cycles. If anything lowering interest rates just encourages more risk and debt and an asset bubble (in property).
If the RBA is concerned about the high $ - it can intervene in the offshore fx market - without adding to the local money supply. Inflation and a high dollar are Australia's biggest dangers - not high levels of interest rates...
If they want to stimulate the economy - they should do it via fiscal policy.
You know it makes sense!
Check out this link:
The problem with forecasts is that they are about the future. However, this highly qualified one looks like a an attempt to pick the recovery in the Australian economy and do a reverse Bill Evans with pike. (Why rates have no further to fall, January 22).
The economies of this world (including Australia) remain phoney manipulations, that are perpetually succoured for the sole purpose of keeping the "gravy train" on its tracks for the top 10% and to deliberately distort fair remuneration regardless of productivity, but based on whether or not one is a 'better' or a 'worser'.
When the majority of a nation don't have to produce anything to obtain a luxurious living, and the money just keeps on being printed or borrowed by governments to fund this 'busy exercise in maintaining social status quo' (which in turn maintains an established political power base norm) it is time to call it by it's correct name - an outrageous ponzi scheme!
The financial world should have been made to take it's 'haircut' 2008. In 2013 it is we, the hardworking innocents, who are about to be 'scalped'. (Why rates have no further to fall, January 22).
The short answer is that all the interest rate experts have no idea (Why rates have no further to fall, January 22).
Ummm, doesn't improved house prices translate to increased poverty amongst the intendant first home buyers now and in the future? (Why rates have no further to fall, January 22.)
All the blustering by politicians and political social workers about their concerns of housing affordability and the social dislocation caused by unaffordable housing is BS. Following the onset of the GFC and now again, their only concern is to keep house prices high and - at the least - growing.
I like the way that commentators talk about Australia's "low inflation environment", and yet never stop to think about, much less investigate, the reality.
Over the past 5 years Australia has become the most expensive country on the planet, not just in the developed world, but ON THE PLANET.
And this despite the highest dollar we have had for decades, and its presumed impact in keeping import costs down.
Talk to anyone who does the household shopping, puts fuel in a motor car, runs a business (especially a small one, where management can't just pass the buck), or visits this country from overseas.
The official figures are total distortions.
"Low inflation environment"?