Economics | Oct 30 2015
By Greg Peel
The weak September quarter inflation numbers were the clincher. UBS believes they “add to the case” for a rate cut on Tuesday. Goldman Sachs says “sufficient” for a rate cut. Morgan Stanley sees a “stronger case”.
Macquarie has already booked a Cup Day rate cut and has moved on to discussing when the next cut will be.
Yet Deutsche does not find the arguments being put forward for a rate cut “compelling”, and Commonwealth Bank is not expecting a cut, while admitting the odds have lifted.
As they say, if you were to lay every economist in the world end to end you still wouldn’t reach a conclusion.
The arguments for a rate cut are as follows:
- The big banks have affected the equivalent of RBA tightening with their mortgage rate hikes
- The housing market has now come off the boil, with Sydney auction clearing rates falling from percentages in the high 90s to 65% currently
- The Aussie has fallen towards US70c
- Another rate cut may be what’s needed to trigger non-mining investment growth
- September quarter inflation was surprisingly weak
The inflation argument is straightforward. The 0.3% rise in September quarter core CPI (ex food & energy) takes the annual rate to 2.2% — inside the RBA’s comfort zone but at risk of shortly falling out. Indeed, Morgan Stanley is forecasting 1.9% in the December quarter which would represent the lowest rate since the recessionary 1990s.
In order for core inflation to reach the RBA’s 2015 forecast, it would have to rise by a percent or more in the December quarter. Such a move is rarely seen in more positive times, let alone now. If there is one thing economists do agree on is that the RBA’s December quarter Statement on Monetary Policy, due on Friday, will feature downgrades to the central bank’s inflation and GDP growth expectations.
Based on the numbers from the last Statement on Monetary Policy, Macquarie estimates it would take a full year for core inflation to return to the middle of the comfort zone at 2.5%, and Macquarie sees inflation risk to the downside.
For the bulk of economists, these inflation numbers alone either shift the odds firmly towards a Cup Day rate cut, or force one.
With regard to other arguments, we can note that while the AUDUSD has indeed come down a long way, the trade-weighted index, featuring other Aussie exchange rates such as to the yen and euro, has not fallen by nearly as much.
In terms of a rate cut providing a long-awaited trigger for sudden investment spending from businesses, we note that Australia’s cash rate has been at an historical low since May 2013, when the RBA first cut below 3% in the current easing cycle, which was the low point in 2009 after the GFC. Prior to that, the previous historical low was 4.75% during Keating’s recession in the 1990s. The cash rate has been at a record 2% since May this year.
The point is, is 1.75% the magic number Australian businesses are holding out for? Or, as Glenn Stevens has himself suggested, have we reached so low a point that further cuts simply make no difference?
With regard bank mortgage repricing, the populist view is that the RBA will simply have no choice but to counter this independent policy tightening with an official cut. Otherwise the Australia economy will go to hell in a handcart.
This view ignores the fact the RBA was expecting mortgage repricing in the light of regulatory tightening around bank risk weightings and capital requirements. An average 17.5 basis points across the Big Four is likely more than the RBA would have assumed, Deutsche Bank suggests, but not a shock to the board.
And while a fall to 65% from plus 90% clearance rates is significant, 65% clearance still implies 15% annual house price growth which is still bubbly in anyone’s books. Moreover, the minutes of the RBA’s October meeting suggested the board believed “the key sources of risk to financial stability, and stability of the Australian economy more broadly, revolved around developments in local property markets”. This line was not found in the Financial Stability section of the minutes, but in the Considerations for Monetary Policy section.
At that stage the banks were yet to reprice, but were the RBA to counter such repricing with a cash rate cut we’d be back where we were, notwithstanding the level to which the banks don’t pass on all of the cut, and hence property would remain a “key source of risk”.
While it is fair to acknowledge the housing market is about the only thing driving the Australian economy’s attempted fight-back against mining sector woes at present, clearly the RBA is concerned over just what would transpire were the property market to truly bubble and burst.
And we also must remember that Australian politicians will always rant and rave about mortgages because Australia’s swinging seats are all “mortgage belt” seats. Never mind that only one third of Australians have a mortgage, the bulk of mortgages established these past couple of years are investor loans, the banks have not repriced their business lending rates, and Australia’s ever growing retired population is already struggling in a very low investment return environment.
So one can make the case that the RBA will have quietly applauded the banks’ repricing, and would see no need to counter.
That just leaves the inflation argument. An argument that is so compelling to some economists they have already booked in a Cup Day cut.
Some, but not all.
Place your bets.
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