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RBA May 2012 Interest Rate Decision?; Cuts likely in May and June?
Topic Started: 5 Apr 2012, 12:02 PM (8,128 Views)
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The RBA has unwittingly empowered the vested interests that dominate its board

By Christopher Joye
Thursday, 05 April 2012

Since the average Australian family’s debt-to-income ratio has risen from 55% in the early 1990s to around 150% today, they’ve become vastly more sensitive to changes in interest rates. Combine that with the fact that most Australian borrowers are on fully adjustable-rate loans that usually price off the RBA’s target rate, and you start to realise that Australia’s central bank is facing significant, and perhaps uniquely acute, community resistance to higher rates. (Never mind that numerically speaking there are actually more savers than borrowers.)

This situation is exacerbated by the highly telescoped nature of Australian economic growth. The newly-appointed and self-described “dove” on the RBA board, Heather Ridout, highlighted this on radio during week: around 80% of the Aussie economy is expanding at an insipid 1% pace while the remaining 20% races along at a spectacular 15% rate. Framed differently, four out of five Australian businesses want rate cuts while one-fifth don’t really care. It’s like the awesome-foursome have one guy rowing at top speed while the remaining three have been given lead oars.

And then we have the government of the day in periodic conflict with Australia’s embattled central bank. For decades the convention was that the independent members of the RBA’s board set staff pay. While the RBA is part-regulator of, and explicit lender of last resort to, the entire banking system, and many of its alumni have held high office in the private sector, top staff are still paid only a fraction of what they could earn elsewhere.

Possibly because of well-documented clashes between the RBA and the government during the GFC (over the 2008 rate hikes and the deposit guarantees), and the subsequent spectre of an overly hawkish RBA eager to raise rates during 2010-2011, Treasurer Wayne Swan broke with his predecessors’ convention and took away the RBA board’s pay-setting powers. At the same time, he promised that future governors would not receive Glenn Stevens’s ‘out-of-step’ $1 million pay packet (ignoring the fact that the average top=10 major bank executive gets about four to five times as much).

Some believe that a parallel assault on the RBA’s independence and credibility was the replacement of the two main “hawks”, or inflation-fighters, on the bank’s board—Professor Warwick McKibbin and Donald McGauchie—with a manufacturing industry lobbyist, Heather Ridout, who says she prioritises growth over inflation, and a former Labor economic advisor, John Edwards. The appointment of Edwards broke the multi-decade tradition of having at least one politically-independent academic expert sitting on the bank’s board.

Professor McKibbin’s regular criticisms of the government’s general policy initiatives doubtless helped convince them that the political costs of elevating academics to the RBA board outweighed the clear governance benefits.

Indeed, it would not be a complete surprise to see Julia Gillard’s recently departed staffer and noted RBA critic, Stephen Koukoulas, one day join Edwards (or replace him), assuming Labor still have the power to make this change.

Koukoulas notably characterised this month’s RBA decision as “candy-arsed”, and has been vociferous in his condemnation of the RBA for not cutting in February.

In light of the dynamics described, it should be no surprise that the community has been baying for cuts. The Australian and The Australian Financial Review collectively published four opinion pieces immediately before this week’s RBA meeting calling on the bank to ease its policy position.

News Limited’s Terry McCrann also chimed in declaring that the odds of an April cut were better than 50%, and, more remarkably, that if the RBA governor recommended another pause, which he did, the doves on the board would roll him. In doing so, McCrann acknowledged for the first time that there had been occasional battles on the RBA board when the numerically-dominant doves had knocked-back staff recommendations to hike rates, which is something I argued occurred in 2011.

Following the RBA’s decision to wait for the first quarter inflation data, we have been overwhelmed with columnists from The Australian and The AFR confidently calling a cut in May, and lambasting the bank for misjudging the pulse of growth.

Of course, much of this is predicated on one unusually low GDP print in the fourth quarter of last year. People seem to forget that these numbers can be revised by stunning margins. For example, in the first quarter of 2011 the ABS told us that the economy had contracted by a horrific -1.2% as a consequence of the east coast floods. The latest estimate is a radically more benign -0.3%. It is not inconceivable that the fourth quarter GDP will revise up to signal healthier growth at the end of last year.

As UBS’s Matt Johnson argues, the growth data tends to revise towards the unemployment rate, which at its current 5.2% level seems to paint a more positive picture.

Those that want lower rates overlook a few other key points. Namely that:

The RBA cut twice only months ago, a move most assess takes 1-2 years to have its full effect;
The currency is now 5% below its level at the beginning of March, and, if it keeps falling, will become a source of inflation rather than deflation;
Australia has high “services” (as opposed to “goods”) and non-tradeables (as opposed to “tradeables”) inflation, with tradeables and goods inflation having been depressed only by the appreciation in the currency;
The unemployment rate remains just a touch above the Treasury’s estimate of its ‘full-employment’ level, and has been bobbing around this mark for a year;
Mortgage rates are actually at or below their long-term averages;
Core inflation is still smack-bang in the middle of the RBA’s target band (not below it), and that this is partly a result of the RBA’s historic rate settings;
We have a carbon tax being implemented this year that many experts think will be more inflationary than the government and RBA forecasts imply;
Productivity looks low and threatens to boost inflation above the RBA’s target band unless it improves;
The two largest economies in the world, the US and China, are currently growing around their trend pace;
The global environment is materially better than the RBA had banked on back in December; and
Central banks around the world have printed over US$8 trillion of new money to underwrite government deficits and bail-out private banks, which history suggests, can be inflationary.

I think one under-appreciated problem for the RBA is that it is discovering just how hard it is to raise rates beyond their neutral level following the regime-change in the economy’s interest rate elasticity during the 1990s and 2000s. After more than 20 years of relatively low inflation (care of China flooding global product markets with cheap goods), there are entire generations of Australians who cannot remember what it was like to have high inflation and double digit rates. And these people vote. In 2011 the RBA executive learnt that it no longer controlled its own board, as Ian MacFarlane had done during his easier and more stable reign. Following the governance revolution implemented by a much more open-minded Glenn Stevens, the RBA has unwittingly empowered the vested interests that dominate its board.

With six private sector representatives and a politically-appointed treasury secretary, the RBA has arguably the most inflation-friendly monetary policy committee of any central bank in the developed world. It also just happens to have one of the highest inflation targets in the world, and, just coincidentally, has failed to meet this target during Glenn Stevens’ term (core inflation has average 3.2% per annum since the December quarter of 2006).

Given the decision-making constraints the RBA faces, and the fact that it believes it has one main policy goal (price stability), which is spun into a “dual mandate” in the long-run (by arguing that if it keeps inflation low it will help maximize employment growth), logic would suggest that it should cautiously, and only when persuaded with reliable empirical evidence, lower the price of money to stimulatory levels. To be clear, this is because normalising it again, and pushing rates into restrictive territory, is a vastly more difficult undertaking.

Years ago I argued that given the RBA’s questionable inflation-fighting track-record since Stevens’ term began, and the abovementioned limitations, it should potentially have an asymmetric response function: all things being equal, the RBA should prefer to slightly undershoot rather than slightly overshoot its inflation target. In practice, the opposite has proven to be the case.

Don’t get me wrong: if year-on-year core inflation prints near the bottom of the RBA’s target band in a few weeks time, and the labour market deteriorates further, this central bank will be almost certainly cutting rates in May.

While the lay fans in the stands may not embrace the decision-making fortitude I advocate here, RBA officials can draw strength from the fact that history tends to be a more impartial judge.

Christopher Joye is a leading financial economist and a director of Yellow Brick Road Funds Management and Rismark. The above article is not investment advice.

Read more: http://www.propertyobserver.com.au/australian-capital-territory/the-rba-has-unwittingly-empowered-the-vested-interests-that-dominate-its-board/2012040554185
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economist
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With respect the RBA erred last month. They should have lowered the cash rate...something is going on as every single contact I have is in the dark about last months none move...this was a no brainer (sic) for the reserve...the fact they didn't move is a concern that global politics are starting to impact on Australia's fiscal policy.

If they don't lower this month I will need to go back to the drawing board.

The retail and employment numbers have been skewed through longer opening hours and seasonal positive corrections perhaps the RBA will use this as an excuse...if they do sell the $aus as every single overseas trader will on the short.

In the US last months employment numbers came in below all of the 80 zombie economists surveyed...yawn...it's about to get a whole lot worse as the positive seasonal fluctuations start to decline. Next month will see an almost flat seasonal fluctuation...the next few months see negative fluctuations...

The fed is in a difficult position and has used much of it's ammunition I would be very very surprised if we don't see the word austerity attached to a US economic report very soon...the fiat starting to look thin.
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peter fraser
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economist
10 Apr 2012, 01:12 AM
With respect the RBA erred last month. They should have lowered the cash rate...something is going on as every single contact I have is in the dark about last months none move...this was a no brainer (sic) for the reserve...the fact they didn't move is a concern that global politics are starting to impact on Australia's fiscal policy.

If they don't lower this month I will need to go back to the drawing board.

The retail and employment numbers have been skewed through longer opening hours and seasonal positive corrections perhaps the RBA will use this as an excuse...if they do sell the $aus as every single overseas trader will on the short.

In the US last months employment numbers came in below all of the 80 zombie economists surveyed...yawn...it's about to get a whole lot worse as the positive seasonal fluctuations start to decline. Next month will see an almost flat seasonal fluctuation...the next few months see negative fluctuations...

The fed is in a difficult position and has used much of it's ammunition I would be very very surprised if we don't see the word austerity attached to a US economic report very soon...the fiat starting to look thin.
Is the RBA concerned about the May budget perhaps?

I'm wondering if Swan may accidentally bring down a masterstroke with a stern budget that forces the RBA to counter with greater than anticipated cuts. Counterintuitive, but consider this:-

1. Swans budget has a greater than expected surplus achieved by increased taxes and lower spending that will hurt the general economy.

2. Stevens understands the implications of Swans incompetence and lowers rates by 0.50% leaving the door open for more cuts.

3. The $AUD falls below $0.90 USD and our tourist and education industries gets a kickstart.

4. Retails gets a boost due to the entrance into internet retailing by our larger retail outlets, and our lower dollar hurts the EBay style buyers whilst our larger concerns obtain bigger discounts allowing them to compete.

4. The fall in manufacturing slows and slowly reverses due to the lower dollar.

5. All of the above helps increase employment opportunities.

6. The lower dollar also helps mining income, rural exports, and our other export industries.


Nett effect positive for local industries despite some added tax burdens and less government stimulus.



Any expressed market opinion is my own and is not to be taken as financial advice
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TED BULLPIT
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peter fraser
10 Apr 2012, 08:59 AM
economist
10 Apr 2012, 01:12 AM
With respect the RBA erred last month. They should have lowered the cash rate...something is going on as every single contact I have is in the dark about last months none move...this was a no brainer (sic) for the reserve...the fact they didn't move is a concern that global politics are starting to impact on Australia's fiscal policy.

If they don't lower this month I will need to go back to the drawing board.

The retail and employment numbers have been skewed through longer opening hours and seasonal positive corrections perhaps the RBA will use this as an excuse...if they do sell the $aus as every single overseas trader will on the short.

In the US last months employment numbers came in below all of the 80 zombie economists surveyed...yawn...it's about to get a whole lot worse as the positive seasonal fluctuations start to decline. Next month will see an almost flat seasonal fluctuation...the next few months see negative fluctuations...

The fed is in a difficult position and has used much of it's ammunition I would be very very surprised if we don't see the word austerity attached to a US economic report very soon...the fiat starting to look thin.
Is the RBA concerned about the May budget perhaps?

I'm wondering if Swan may accidentally bring down a masterstroke with a stern budget that forces the RBA to counter with greater than anticipated cuts. Counterintuitive, but consider this:-

1. Swans budget has a greater than expected surplus achieved by increased taxes and lower spending that will hurt the general economy.

2. Stevens understands the implications of Swans incompetence and lowers rates by 0.50% leaving the door open for more cuts.

3. The $AUD falls below $0.90 USD and our tourist and education industries gets a kickstart.

4. Retails gets a boost due to the entrance into internet retailing by our larger retail outlets, and our lower dollar hurts the EBay style buyers whilst our larger concerns obtain bigger discounts allowing them to compete.

4. The fall in manufacturing slows and slowly reverses due to the lower dollar.

5. All of the above helps increase employment opportunities.

6. The lower dollar also helps mining income, rural exports, and our other export industries.


Nett effect positive for local industries despite some added tax burdens and less government stimulus.



Some good points Mr Fraser , but I think the dollar would need to go below 90 cents for there to be any substantial improvement with the state of things , thats not to say we may not end up below 90 cents . My concern is the US is being made to look better than it really is and when people start to relize it is not , it may then keep out dollar above 90 cents for some time . It really is a case of who knows but it seems in the short term it may come down a bit further . Funny that our poll now has more people decided on no rate rise rather than a .25 drop. I went for the drop as at the moment I think that is the more likely scenario .
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peter fraser
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TED BULLPIT
10 Apr 2012, 09:23 AM
Some good points Mr Fraser , but I think the dollar would need to go below 90 cents for there to be any substantial improvement with the state of things , thats not to say we may not end up below 90 cents . My concern is the US is being made to look better than it really is and when people start to relize it is not , it may then keep out dollar above 90 cents for some time . It really is a case of who knows but it seems in the short term it may come down a bit further . Funny that our poll now has more people decided on no rate rise rather than a .25 drop. I went for the drop as at the moment I think that is the more likely scenario .
I think that you will find Ted that people on this forum vote for what they want to happen rather than what logic tells them what will happen.

Some polls here have been completely wrong - in fact I doubt that we have had a better than 50/50 record over time.

Any expressed market opinion is my own and is not to be taken as financial advice
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TED BULLPIT
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peter fraser
10 Apr 2012, 09:31 AM
TED BULLPIT
10 Apr 2012, 09:23 AM
Some good points Mr Fraser , but I think the dollar would need to go below 90 cents for there to be any substantial improvement with the state of things , thats not to say we may not end up below 90 cents . My concern is the US is being made to look better than it really is and when people start to relize it is not , it may then keep out dollar above 90 cents for some time . It really is a case of who knows but it seems in the short term it may come down a bit further . Funny that our poll now has more people decided on no rate rise rather than a .25 drop. I went for the drop as at the moment I think that is the more likely scenario .
I think that you will find Ted that people on this forum vote for what they want to happen rather than what logic tells them what will happen.

Some polls here have been completely wrong - in fact I doubt that we have had a better than 50/50 record over time.

Sounds very hard to believe Mr Fraser :D

I did'nt even think of that . So we know have a bear majority voting for no drop cause they want to see house prices falling further .
There will be further drops , but like the last two we have had, they are a little too little, too late and at best will only slow the decine slightly , not that the last two drops seem to have slowed it considering it has sped up if anything.
Edited by TED BULLPIT, 10 Apr 2012, 10:00 AM.
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peter fraser
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TED BULLPIT
10 Apr 2012, 09:59 AM
peter fraser
10 Apr 2012, 09:31 AM
TED BULLPIT
10 Apr 2012, 09:23 AM
Some good points Mr Fraser , but I think the dollar would need to go below 90 cents for there to be any substantial improvement with the state of things , thats not to say we may not end up below 90 cents . My concern is the US is being made to look better than it really is and when people start to relize it is not , it may then keep out dollar above 90 cents for some time . It really is a case of who knows but it seems in the short term it may come down a bit further . Funny that our poll now has more people decided on no rate rise rather than a .25 drop. I went for the drop as at the moment I think that is the more likely scenario .
I think that you will find Ted that people on this forum vote for what they want to happen rather than what logic tells them what will happen.

Some polls here have been completely wrong - in fact I doubt that we have had a better than 50/50 record over time.

Sounds very hard to believe Mr Fraser :D

I did'nt even think of that . So we know have a bear majority voting for no drop cause they want to see house prices falling further .
There will be further drops , but like the last two we have had, they are a little too little, too late and at best will only slow the decine slightly , not that the last two drops seem to have slowed it considering it has sped up if anything.
Ted - the last two drops did indeed halt the decline and some gains have been made, but only slight.

More interest rate falls will help home prices stay higher, and may even increase them, but I think that in real terms they will gradually be eroded by inflation.

Consider this, if we see a 0.75% fall in interest over the next 12 months, that equates to an interest saving of about 12% for most borrowers, so it is definitely a stimulus for housing.

It will also help people pay down debts faster, and it may encourage more spending as more is left over after mortgage payments. On the negative side we all may be faced with higher utility costs (electricity and fuel in particular) so the net effect is difficult to determine.

Any expressed market opinion is my own and is not to be taken as financial advice
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hoofarted
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"Consider this, if we see a 0.75% fall in interest over the next 12 months, that equates to an interest saving of about 12% for most borrowers, so it is definitely a stimulus for housing."

The banks dont seam that keen on passing on any rate cuts... Is your 12% based on the full 0.75 being handed to the sheeple?
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peter fraser
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hoofarted
10 Apr 2012, 02:05 PM
"Consider this, if we see a 0.75% fall in interest over the next 12 months, that equates to an interest saving of about 12% for most borrowers, so it is definitely a stimulus for housing."

The banks dont seam that keen on passing on any rate cuts... Is your 12% based on the full 0.75 being handed to the sheeple?
Yes - fully passed on. You might like to think that the banks will keep a lot of that, but I really doubt that they will. They have actually increased their margins recently, and a couple of banks have shown some interest in discounting again.

Actually a fall in the $AUD would suit you, so I don't see the issue for you, and the "sheeple" who bought some years ago will be very happy to see lower rates which will allow them to reduce their home loans at a much faster rate.

The sheeple seem very content indeed.

Any expressed market opinion is my own and is not to be taken as financial advice
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newjez
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economist
10 Apr 2012, 01:12 AM
With respect the RBA erred last month. They should have lowered the cash rate...something is going on as every single contact I have is in the dark about last months none move...this was a no brainer (sic) for the reserve...the fact they didn't move is a concern that global politics are starting to impact on Australia's fiscal policy.

If they don't lower this month I will need to go back to the drawing board.

The retail and employment numbers have been skewed through longer opening hours and seasonal positive corrections perhaps the RBA will use this as an excuse...if they do sell the $aus as every single overseas trader will on the short.

In the US last months employment numbers came in below all of the 80 zombie economists surveyed...yawn...it's about to get a whole lot worse as the positive seasonal fluctuations start to decline. Next month will see an almost flat seasonal fluctuation...the next few months see negative fluctuations...

The fed is in a difficult position and has used much of it's ammunition I would be very very surprised if we don't see the word austerity attached to a US economic report very soon...the fiat starting to look thin.
Hasn't austerity already been forecast in the US?
Whenever you have an argument with someone, there comes a moment where you must ask yourself, whatever your political persuasion, 'am I the Nazi?'
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