Do people really think cutting by 50 points will make people more confident? A 50 point cut generally means that we are in serious trouble. Fan is on full and catapult loaded with poo. 50 points means 'we read it really wrong last time, and everything has gone pear shaped'. Is that where we are? I don't think so. I think a 25 point cut is hard to justify, but there is so much pressure it may happen. But more? Seriously?
Actually Newjez, I wouldn't be surprised if it did give confidence a little bit of a boost. It's been an entire generation since we experienced a recession in this country - I think that only a small handful of people perceive the existence of a poo-loaded catapult pointing at a giant fan. More likely they will hear "now is a goodtime to jump in" IMO.
They won't cut interest rates all year unless the global GFC2 occurs.
stinkbug omosessuale Frank Castle is a liar and a criminal. He will often deliberately take people out of context and use straw man arguments. Frank finally and unintentionally gives it up and admits he got where he is, primarily via dumb luck! See here Property will be 50-70% off by 2016.
Costs in the economy have dropped for the first time in more than two years, adding to the case for a rate cut when the Reserve Bank meets next week.
Australia’s producer price index fell by 0.3 per cent in the March quarter, taking the annual figure to 1.4 per cent, the Australian Bureau of Statistics said. Economists had tipped first-quarter PPI to rise 0.5 per cent and 2.2 per cent for the year.
The last time the PPI fell for a quarter was in the final three months of 2009 amid the turmoil of the global financial crisis.
Producer prices, while not having a direct link to consumer prices, give an indication of overall costs changes at work in the economy.
“Price pressures aren’t that great,” said National Australia Bank economist Alexandra Knight. “We’ve had a lot better conditions for agriculture so it’s taken some price pressure off there.
“We’ve seen a general softening in commodities prices in the first quarter too,” she said.
The dollar slipped about a third of a US cent on the data as chances of a rate cut rise, and was recently trading at $US1.0338. Government bonds rose, pushing the yield on the 10-year security down by as much as seven basis points, or 0.07 percentage point, to 3.76 per cent, the lowest since February 3. Bond prices and yields move in opposite direction.
The Reserve Bank has already indicated it will consider cutting the 4.25 per cent cash rate at the May 1 policy meeting, providing inflation numbers are tame.
Financial markets imply a 92 per cent probability of a cut to 4 per cent in May, and almost 100 basis points of easing over the next 12 months.
With so much talk about tomorrow's ABS inflation data, and the potential ramifications this will have for the RBA's rates decision at its May Board meeting, I thought I would pull together my own "cheat sheet".
In brief, this guide combines the March quarter "core" inflation numbers with the inflation measured over the preceding three quarters to give a March 2012 year-on-year result. The RBA has become increasingly wary of historical revisions to the ABS's underlying inflation data (known as the "trimmed mean" and "weighted median"), and is likely to place significant emphasis on the broader results over the last six and 12 months.
By way of background, the RBA has worked hard to prepare the public and financial markets for a cut in May subject to the outcome of the March price data. Predicting a cut if inflation prints low is easy. The much more difficult challenge was anticipating the RBA's decision to hold rates steady in February, March, and April, which caught some experts unawares.
Of the 22 economists polled by Bloomberg (I have also added in the ALP's Stephen Koukoulas), none are predicting an especially high core ("trimmed mean") inflation print: the maximum quarterly estimate is 0.7% from Credit Suisse, JP Morgan, and Nomura (see first chart below). At least seven economists are expecting a relatively low core inflation number of 0.5%. Given the currency appreciation, declining import prices, weak producer prices, and various surveys pointing to benign retail prices, it's possible that inflation is assessed to be even lower than 0.5%.
Of course, the flip-side of this coin would be an upside surprise. Nobody is projecting inflation breaching the top of the RBA's target 2-3% per annum band in the March quarter. A positive "surprise" would be anything greater than 0.7%.
It is also interesting to observe that the economists' year-on-year expectations are all universally anodyne. Only two houses (Credit Suisse and Nomura) are predicting that the 12 monthly result with hit the mid-point of the RBA's target band at 2.5%, which is where the RBA believes inflation currently stands.
Every other forecaster has a year-on-year number below the mid-point of the target band, which opens the door to RBA rate cuts. A curve-ball here are substantial revisions to the third and fourth quarter data from last year, which could mean that even with a soft first quarter number year-on-year inflation stays at or above the mid-point of the RBA's band.
The question is then what all of this means for what the RBA (or, more precisely, its Board) decide to do in May. I've taken the RBA's latest estimates of core inflation in Australia over 2011 and combined these with a range of hypothetical outcomes in March. I've then offered up my own opinion of what the RBA might do--subject to global events, revisions to past data, and changes to bank lending rates--in the far right-hand-side column.
Today’s low inflation reading has confirmed a rate cut in a week’s time.
Many punters will argue the Reserve Bank did not need to wait for this particular green light before adjusting the cash rate down, and should have been listening to the line-up of angry homeowners, builders, retailers and manufacturers hooting at Glenn Stevens to put the car in gear and get a move on.
Even the likes of Channel 7 Sunrise host David Koch (a self-confessed admirer of Glenn Stevens) has hit out at the Reserve Bank for being too overly cautious and too slow in responding to the current economic downturn at a time when the government is determined to cut spending to achieve a budget surplus in the next financial year.
On the ABC’s Inside Business program this weekend stockbrocker Marcus Padley said he could not believe that the Reserve Bank was still waiting for the inflation figure given the struggles facing the retail and housing sectors.
“Inflation surely is not the issue right now – you have a retail sector and a housing market [literally] on fire and here you have the RBA telling us they will wait for the inflation number, they’re simply missing the point,” said a gobsmacked Padley.
Perhaps facetiously, some economists have suggested that if the RBA is so reliant on the quarterly inflation data then perhaps it should only meet every quarter to decide on interest rate settings.
Alternatively, they could put more emphasis on the range of other more regular data in making an assessment or put more faith in the forecasts of economists, which have been forecasting a low March quarter inflation reading for some time now.
For now the debate will continue to rage about how swiftly the Reserve Bank is responding to the two-speed nature of the economy and why it is placing so much emphasis on containing the effects of the mining boom when other sectors are in real strife.
That is until the RBA makes its May 1 rate announcement and we await to hear whether the RBA will pass on the full rate cut or leave borrowers with just a few crumbs.
For months the Reserve Bank of Australia has said it would patiently wait for the consumer price data to confirm that the door was open to rate cuts. It got unambiguous affirmation of that reality from the ABS at 11.30am today.
In the best possible news for Australia’s economy, core inflation printed at just 0.35% in the March quarter. Despite some small upward revisions to last year’s fourth-quarter data, core inflation in Australia is sitting near the bottom of the RBA’s target 2% to 3% per annum band at around 2.2%.
But there is possibly more good news to come. Next quarter the annual inflation numbers will lose the very high underlying inflation print from way back in June 2011. This implies that the annual inflation figures could slide further in the second quarter of 2012.
What does this mean for interest rates? In my last column I provided a “cheat sheet” based on a range of different outcomes today, which I have enclosed below. We ended up getting a result that arrived somewhere between the top two rows of my table. As you can see from the right-hand-side column, this connotes a minimum 25-basis-point cut in the RBA’s official target cash rate come May.
Speculation will mount that the RBA could go even further with a 50-basis-point cut. One of the most persuasive arguments for this action is additional margin expansion by the banking community.
Assuming the RBA cuts by 25 basis points in May, we will have had a total of three cuts, or 75 basis points worth, since November. If the other banks follow ANZ’s six-basis-point hike by a similar margin, the net benefit to Aussie borrowers would have been 55 basis points, or two rate reductions (taking May as given).
Yet the RBA will probably choose to wait until it has the benefit of seeing the Gillard government’s budget after its May meeting. If it does so, its view of the world remains unchanged, and, finally, the banks do not pass on the May cut in its entirety, then the probability of follow-up relief in June would rise materially.
The low inflation numbers deliver the best of all possible worlds for Australia’s torpid housing market. Mortgage rates are currently around their average levels. However, long-term interest rates, as measured by 10 year government bond yields, are at all-time lows. This should allow banks to further cut the cost of fixed-rate home loans, all things being equal.
In addition to lower fixed-rate loans, the 4 million-plus Australian borrowers on variable-rate loans will get a third rate reduction in May with the prospect of a fourth bout of accommodation in June. Given the news on prices today, the RBA will be comfortable pushing lending rates into “stimulatory” territory—that is, levels that are lower than their long-term averages.
The latest auction clearance rate data in the two biggest auction markets, Sydney and Melbourne, suggest that the overall market is travelling okay. Last weekend auction clearance rates in both cities hit circa 60%, according to RP Data. This followed a noticeable slump in clearance rates, and housing conditions more generally, during the traditionally weak Easter period (see chart below).
In 2012, the Aussie housing market has displayed some signs of stability after the consistent declines experienced during 2011. We forecast this result on the basis of the RBA’s two rate cuts in 2011, although the banks have chiselled away at this relief. The market’s 2012 base is evident in the chart below, which illustrates the 30-day moving average attributable to RP Data-Rismark Eight Capital City Dwellings Index.
Finally, there are tentative signs of life in zombie-like, ultra-premium part of the market. It was reported today that a holiday home in Palm Beach sold for a record price well in excess of $20 million, which, if correct, smashes the previous Palm Beach record of around $14 million. This home had only been listed for seven months before it was snapped up. (Disclosure: a related party was involved in the transaction.)
AUSTRALIANS can expect a series of rate cuts, beginning with a drop of at least 0.25 points at the Reserve Bank board meeting next Tuesday, after much weaker than expected inflation figures.
The consumer price index climbed just 0.1 per cent in the first three months of the year, and by just 1.6 per cent over the year to March - the weakest annual price growth since the 2009 global financial crisis. This is a sign that both inflation and economic growth are weaker than the Reserve had expected.
More rate cuts are likely to follow in response to a tough budget which will tend to further dampen economic activity in the quest for a surplus.
Debate at Tuesday's meeting will be about whether to cut the cash rate by 0.25 or 0.50 points.
Lower interest rates and easing cost of living pressures could take some sting out of the unpopular carbon tax, to be introduced in July.
Pushing down prices was a 60 per cent drop in the price of bananas in the quarter and a 30 per cent fall in the price of fruit. Over the year to March fruit prices fell 24 per cent and vegetable prices 17 per cent.
Even ignoring the price of volatile items such as fruit and vegetables, inflation is weak. The Reserve's measure of so-called underlying inflation came in at an extraordinarily low 0.35 per cent for the quarter and 2.15 per cent for the year. The annual figure is the lowest in 13 years.
But won't the Chinese sell when the rates start to drop?
They will get creamed by the exchange rates.
They haven't bailed out of Vancouver, which has gone through various ups and downs since the mid-1990s period (pre-Hong-Kong-handover) when HK-based interest first rocketed. The CAD has been slightly steadier than the AUD during the period, but not much.
For those Chinese who can afford it, an offshore property is a longterm insurance policy, more an investment in an (English-language) offshore education and a second passport for the children, than a strict property investment.
Since about September last year, I have been of the view that the economic and financial market fundamentals would see the RBA cut the cash rate to 3.5% by around the middle of 2012. I will stick with this view for now. The issue jumping up at the moment is where to after that for interest rates in the latter part of 2012 and into 2013.
Based on recent data, a case is building that suggests the RBA may need to go below 3.5% over the medium term. The market is close to pricing in a 3.0% cash rate for early 2013 and clearly, this is where the risks are.
That said, it will take a sharp rise in unemployment and a further drop in inflation for the RBA to move official rates back towards the depths of the GFC levels, which coincidently was 3.0%.
To be sure, inflation has undershot expectations by more than a full percentage point, house prices are continuing to fall (unlike that RBA assessment at the April meeting where they suggested “Housing prices have shown some signs of stabilising recently”) and the bulk of the activity indicators are soggy. A tight Budget will also subtract from GDP growth in the year ahead. A fragile world economy is, of course, another wild card.
These issues are likely to be neutralized or turned around with around 75 basis points more of interest rate cuts in the near term. Something like 60 basis points of so will be passed on to mortgage and business loans meaning that monetary policy will be accommodative. Mortgage rates, in these circumstances, would be of the order of 6.75% which should be enough to stem the weakness in housing.
For the RBA to go below 3.5% for cash, and therefore mortgages towards 6.5% or lower, there needs to be a meaningful rise in the unemployment rate (towards 6%) and another few quarters where underlying inflation muddles along near 2% or lower.
This may happen, but it seems to be more of a worst-case scenario that a core view.
For now, the RBA will be cutting the cash rate to 3.5% in the next few months which just might be enough to support growth and keep inflation in the target range.
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