A miner conundrum for the RBA

Interest rates are likely to remain on hold at 2.75 per cent following today’s meeting of the Reserve Bank board but there will be a heated debate about the need for a further interest rate cut in the not too distant future.

The discussion over an interest rate cut is gaining momentum to the point where I would not fall off my chair if the Reserve decided to announce a 25 basis point cut this afternoon, as a run of generally softer economic news has emerged in recent days to overwhelm what had been slightly better news a few weeks ago. 

It will be a close call.

The case against cutting interest rates at the moment is built on the positives of solid trend employment growth up to April and the fact the unemployment rate fell back to 5.5 per cent. House building approvals also lifted strongly and retail spending has only edged lower after two very strong months at the start of 2013. The fall in the Australian dollar, while not an issue that has any meaningful impact on medium term Reserve Bank deliberations (Dollar dips and rate cuts go hand in hand, May 28) could add to the case today for no change but on most measures, the currency remains overvalued.

Against this platform of reasonable news is a raft of information which is somewhat disconcerting for those who welcome GDP growth, job creation and rising living standards.

Information on the global economy has certainly been no better than was assumed a month ago, and the slide in commodity prices has gained fresh impetus in recent weeks. This is especially unwelcome, as is news of a resumption of falling house prices. 

According to RPData, house prices fell 1.2 per cent in May after falling 0.5 per cent in April and already in the first three days of June, prices are down another 0.1 per cent. Household credit growth also remains weak. The cautious consumer remains evident in these figures.

The TD-MI monthly inflation gauge rose a tepid 0.2 per cent in May for an annual rise of 2.2 per cent. Recall that about 0.7 per cent of the annual increase is due to the one-off price impact of the carbon price, which took effect on 1 July 2012. Excluding the carbon effect, annual inflation is nearer 1.5 per cent, well below the bottom of the 2 to 3 per cent target band for the Reserve. Inflation is certainly not an impediment to the bank cutting interest rates again.

In addition to the hard news on ongoing low inflation, yesterday the Fair Work Commission announced a 2.6 per cent increase in the minimum wage, a moderate result that from a macroeconomic perspective should knock on the head any lingering talk of wage induced inflation. On the contrary, the recent run of data on wages points to decelerating wage pressures which should also work, with the usual lags, to keep inflation pressures well and truly in check.

Perhaps most disconcerting is the ongoing fall in the number of job advertisements measured by ANZ. They have fallen for three straight months and are now a sizable 28 per cent below their late 2010 peak. This fall in job ads is consistent with a further increase in the unemployment rate in the months ahead. The budget forecasts for an unemployment rate of 5.75 per cent from the current 5.5 per cent unfortunately looks assured.

Amid all of this, consumer confidence has fallen back sharply in recent months and the appetite for spending on big-ticket items is low. Business sentiment from both the NAB and Dun & Bradstreet surveys point to soft activity into the middle of 2013. The business investment outlook continues to be problematic, with mining likely to be the main area of softness.

The Commonwealth budget last month also locked in further fiscal tightness. Indeed, once the state and local government sector is added to the Commonwealth budget policy, public demand is going to record close to zero growth in 2013-14 and in doing so, will not add anything to GDP. 

Clearly, all of these factors suggest there is a case for an interest rate cut today and the decision will come down to the wire. The Reserve Bank’s judgment on the mining boom and the health or otherwise of the global economy will determine whether rates are cut or not. These are the two areas the bank got badly wrong over the last two years and are a reason why it has, on balance, been tardy in cutting interest rates.

This afternoon, we should have a fair idea whether the bank has learned from these mistakes – it probably should cut interest rates again, but probably won’t.

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Stephen, pity you hadn't been singing this song 12 months ago, your comments today only tell us you were not looking where the rubber hits the road, you were not looking and investigating where the real economy is, so too little too late, you have listened too much to your labor mates both in the government and Treasury, neither have a clue. Treasury is always observing a minimum of 3 months after the cause, then waite at least another 3 months before they effect half of what is required.
If the GDP or productivity has improved it has nothing to do with the real economy, just means we are just better at digging holes and shipping them to China, nothing else to see here.

I 100% agree with this comment. If we had highly skilled people running the economy of Australia they would have started 5 years ago preparing the economy for the post resource boom period. They would have pointed the economy to new sources of revenues (e.g development of hi-tech products). Instead they poured billions of dollars into programs that do not generate revenue in the long term. The people in charge of managing the economy of Australia, during the resource boom period, remind me a poor guy who won the lotto prize and spent the money in a couple of years to end up poor again.

The Australian Bureau of Statistics [ABS] tells us that about one third of the population own their own home without mortgage,one third are paying for mortgage and one third are saving for a mortgage.
The Reserve Bank of Australia tells us that households have 150% of disposable income as debt.
Now as the family home mortgage is by far the largest part of household debt,it doesn't take too large a leap to deduce that this 150% figure is the burden of mainly one third of households : in other words this one third of households has 450% of their disposable [after tax] income in debt.That is quite a lot of debt when we consider that in those households there is usually both spouses are working.
So it is this one third section of the population that is being helped with depression-level low interest rates.Still,they have so much debt that the extra disposable income they have is used in paying down that debt.

What of the other two thirds of the community.
The younger one third are either studying and living at home [including young children] or are renting and saving for a deposit on our very expensive housing.This third has very little disposable income because of these endeavours,whilst in the stage in life when they earn the
lowest income in their lives.Extremely low interest rates prevent extra spending in the economy here,especially considering the longer time it will take to save for a home deposit.

The older one third,the third that I'm experienced in,has very little disposable income,most of which comes from the extremely low interest earned on savings.This third is making very deep cuts in discretionary spending...some are walking around their house wrapped in a blanket this time of year to save on electricity.

Could the Spectator please explain to the reader : how will things get better with extremely low interest rates? In which part of the planet Earth does this paradigm of serfdom work......
Japan?,Eurozone?, UK?,US? If we could see this working in just some tiny population on some little island somewhere,perhaps that would make us feel warm and fuzzy about suffering
this crazy,stealthful tax of very low interest rates.

"It is common sense to take a method and try it.If it fails,admit it frankly,and try another."
--- Franklin Delano Roosevelt

If you’ve got hundreds of thousands of dollars in the Bank, the interest on which you
can afford to live off, you are very wealthy compared to most of the population.
And if we are in a depression as you surmise interest rates indicate, then with hundreds
of thousands of dollars in savings you are the luckiest people alive.

But not satisfied, you want to bankrupt your mythical 2/3 of the population and destroy
their primary savings asset so you can go to the grave with all your savings fully intact
and the snotty little x y or z ‘the world owes me a living now’ generation can
get a Mcmansion close to the city, yesterday, when they apparently deserved it.

Selfish much ?

Then again if you are stupid enough to have your superannuation in silver and gold
you will get your just desserts for greedily trying to bankrupt the rest of the community
for you own selfish gain, when gold is $600 an oz or less.

John,most of us are living from capital,not interest...that's the point.
I can't really comment on your bitterness towards me personally.

Having a few hundred thousand in the bank means you are poor if you are retired. You need $2M to live without a pension. For those stupid enough not to have at least 10% of their assets in gold, obviously they believe that most of the central bankers in the rest of the world are not debasing their currencies. As for silver, get coins. You may one day need them. When you do its too late to buy any. I will be very happy to see a $600 gold price. That means I can buy it at a low price. I have noticed that every time there is a dip China & India buys up. Must mean most of the world's population is stupid? All that need happen is a bid from a sovereign on Cyprus's gold reserves. Then watch the fireworks. Ben would have to lift interest rates.

That sounds like a stupid pathetic rant JT........................

Hi John - I feel your attribution of the problem is misdirected. The attribution lies with governments who overspend on policies that do not provide an ROI.
There are 2 problems with this:
i) It makes some happy today but saddles the next generation with a bunch of debt
ii) Cutting interest rates continually down to zero encourages buys temporary happiness through asset price explosions - the very case which blew up the us housing market. It also saddles the next generation with house prices they cannot afford.

In short all your advocating is a system that does not allow retirees (which you will be one day) a risk free income stream and saddles the next generation (which may concern you if you have kids) with debt and expensive house prices.

People may squirrel all their working lives to have an enjoyable retirement. I don't think you should be blaming those who were responsible in their life. I think you should be blaming the government for not balancing the books.

Adam, a risk free income stream from an investment ? Just where is that Utopian planet ? Saving for your retirement doesn't give you a right or a guarantee to a risk free investment or an investment that stops you having to spend your savings. Financial advisers have perverted peoples understanding of savings, from money for a rainy day, or retirement, to 'an investment opportunity', not surprisingly.

Utopian planet - I think you'll find its the norm in financial markets that instruments get priced based on how much risk you want to take on.
What is happening today is not normal (how often have western governments embarked on QE like this in recent history). This may give you a hint that things are currently not normal.

What is happening today is often compared back to the 1930s - if your definition of normal is something that happened 80 years ago then you're entitled to that opinion.

John, because I paid into super as a teenager and went without forever so as to save for a future, that this is wrong and greedy and a rightful target for your hate? Not all of us are bunnies and grew up in world of 'financial advisers'. The low interest rate John you desire causes inflation and that will stop this savings nonsense.

Apart from your bitterness what are you doing for when you can't work or cant get work? Do you plan to live off the rest of us?

What do you want of others? that we deliberately fritter and blow our savings and then go on the Old Age pension, free medical, spectacles, prosthetics, hearing aids every few years etc discounts and every bit of taxpayer funded support offered and indeed needed for survival. This costs a lot and will come out of your tax dollars and the more oldies forced into that the more you will pay in tax mate. People living to a 100 now, thats a lot of years for you to support.

Hi Stephen,

The way I tend to look at it, is that the impact on the individual, is an indirect consequence of the way the 'system' works.

The setting of the interest rate, and the manipulation of the price and availability of capital, are key parts of the system of fractional reserve banking.

At the center of the system of fractional reserve banking.. is the Reserve Bank. (and its equivalents globally)...

Inflation (in various forms), debt, leverage, credit growth and creditworthiness are other vital components.

The Reserve Bank acts to protect the interests of the system.

This system is inherently unstable. Leverage of 50 to 100 times is common.

Have you ever wondered why the Reserve Bank targets inflation between 2% to 3%. You mention a 'tax by stealth' in your post... inflation targeting is the tax by stealth... low interest rates are merely the lever by which the Reserve Bank attempts to achieve its target.

When you think about the system, it is obvious that it cannot tolerate extended periods of deflation.

Those that control the system will therefore do whatever it takes to avoid such a scenario.

Moral hazard is created out of this... there is an implicit 'put option' on risk taking... in order to protect 'the system', those that make poor decisions, do not suffer the consequences....

Too big to fail is simply a systemic reflection of this age old adage.. 'if you owe the bank $1 million dollars... you've got a problem... but if you owe the bank $1 billion dollars... the banks got a problem...'

Interest rates may not fall today (but I wouldn't be surprised if they do, given the real estate data out recently showing price falls everywhere except Perth and Hobart)... but the trajectory is for further interest rate reductions down to at least 2% with all else being equal...

you can take that to the bank.

Hi Keyser,
I understand what you are getting at,but I guess what I'm trying to do is make the Spectator admit that the very low interest rates are not really there to help the economy by providing cheap funding for business.
In the UK,US,Eurozone and Japan,the quantitative easing is provided to enable each of those central banks to swamp their respective bond market auctions to bring down long bond interest rates to monetize their government debts at really low interest,so that they can afford to pay these sovereign debts over the next 30 years.
I don't fully understand why our own RBA has joined the currency war,and our government's circumstances do not include quantitative easing.However,the RBA may be doing this in order to counter any chance of a residential property crash,in fear that we could end up with our banks collapsing,leading to our government bailing out the banks,or worse by bailing in the banks a la Cyprus.

Hi Stephen,

I think you are on the right track with the last part of your post...

To use parlance from Bill Gross of PIMCO fame... Australia is the 'cleanest dirty shirt'.. I.e the best of a bad bunch..

Whilst our public debt to GDP at the federal level is quite low on a global context, when you add state debt, and in particular private debt, we are amongst the most indebted people on the planet.

The GFC scared 'the consumer' good and proper.

De-leveraging has been going on at household level ever since.

In spite of massive reductions in interest rates confidence is low, retail sales are weak, credit growth is weak (both private and business) property market is flat to declining, and now the jobs market will start to soften markedly.

Remember, in order for the system to function, there MUST be inflation.

Zero growth is still fatal.

RBA will keep cutting until the numbers turn positive, or until inflation breaks out, which forces them to change direction...

Spot on Stephen Nordstrom...well said!!!

Interest should have been set at 5% ...., forever. A low interest rate just gets people into housing they cannot afford. The other side of the equation can be used to lower the dollar. No not QE. It the interest on the debt. Renegotiate all the government loans at the QE rate. Say 2% max at 30 years. Bid on euro sovereign gold reserves. Hurt the foreign bankers. They will soon cease QE. Next lower the price of energy. Make ALL the boat people stay in Indonesia building dams for three years. Not as slaves, but employees. Cost $3B/year. Current cost $3B/year. Negotiate for part of the power and a large volume of water. Help the Indonesians grow richer. That way they can afford our food and have electricity for cooling food.


As per my post above, 'low interest rates just getting people into housing they cannot afford'. Is precisely the point...

An intended consequence for sure.

Mr. Koukoulas,

Thankyou for your article.. I particularly enjoyed this...

'Against this platform of reasonable news is a raft of information which is somewhat disconcerting for those who welcome GDP growth, job creation and rising living standards.'

The not so subtle implication of this paragraph, is that people who do not share your views on 'the answer', do not 'welcome GDP growth, job creation and rising living standards'.

Are we getting defensive?... is the tirade of negative sentiment expressed in response to your articles on BS, starting to have an effect on you?

Hope so...

Given that economics is largely speculation, with no 'unequivocal laws', but merely theory... there are any number of answers to any given question...

Your current posting is a case in point..

On the one hand.... but then again on the other hand...

You are not stuck in the matrix Mr. Koukoulas... every day, you get an opportunity to change.

Red pill or blue pill?

Jeepers John Tozer...are you serious...or just trying to wind us "savers Up?
When did a few hundred thousand make you wealthy?
If the people needing loans can't pay them off at the current rates ( 5.5% on average), how will they cope at double that rate?

According to Stephen Nordstrom interest rates will be below 5% for the next 10 to 20 years.

"Mythical 2/3" you mention is actually "factual 1/3" if you had taken more time to analyse Mr Nordstrom's article. It means those who have borrowed excessively are in fact the minority group. Also, having 10-15% of in Gold & Silver bullion is more a hedge against high inflation to protect one's capital. How does this contribute towards bankrupting the "rest of the community"? Is it because it means I have less disposable income for consumption which affects GDP?

Durand - clarification. Having gold or silver doesn't bankrupt the community but a housing crash will.

Thanks for the laughs John Tozer. What a whacker (not misspelt).
What age group are you in and do you have any constructive thoughts, suggestions, ideas of your own? Other than scathing criticism?

Wouldn't want my kids taking on home loans, if they need the interest rates to stay at 5% for the next 10-20 years. If you can't cover interest rates of say 8% , then you'd be a fool for taking out a loan.

Agree. 11.5% was the going rate when I first tried to buy a home, the banks refused my sister and I as we were women. These young ones don't know what has been and can occur. Aus housing bottomed in 1952 from the high in the 1800's. Its a long cycle that the RBA cant control.