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RBA Reserve Bank Interest Rate Decision for October 2013
Increase by 25 basis points 0 (0%)
Hold cash rate at 2.5% 8 (88.9%)
Decrease by 25 basis points 1 (11.1%)
Total Votes: 9
RBA Reserve Bank Interest Rate Decision for October 2013; Fed delay puts pressure on Reserve
Topic Started: 20 Sep 2013, 09:04 AM (2,098 Views)
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Fed delay puts pressure on Reserve

September 20, 2013
Glenda Kwek

The US Federal Reserve's decision to delay cuts to its massive stimulus program is set to weigh on the Reserve Bank and keep the door open for another interest rate cut, after the Australian dollar soared to a three-month-high on the surprise move.

The US central bank's move shocked financial markets, which expected a modest reduction of up to $US10 billion in its monthly $US85 billion quantitative easing program. It sparked a global rally, pushing US stocks to record highs and bringing relief to embattled emerging markets hit by fleeing foreign capital.

The Australian benchmark S&P/ASX 200 Index closed 1.1 per cent higher at a new five-year high of 5295.5. The broader All Ordinaries gained 58.2 points to finish at 5288.6.

The Australian dollar gained 1.5 per cent to trade above US95¢, a level not seen since mid-June, after the Fed's statement sent the US currency into a tailspin. The dollar was buying US95.16¢ late Thursday.

Currency strategists said the Australian dollar could maintain its recent gains, pointing to December as the next possible time the Fed could consider tapering its quantitative easing program.

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Read more: http://www.smh.com.au/business/fed-delay-puts-pressure-on-reserve-20130919-2u2kj.html
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My guess is no change, although the interbank implied yield dropped yesterday.

http://www.asx.com.au/data/trt/ib_expectation_curve_graph.pdf

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While it's true that those who win never quit, and those who quit never win, those who never win and never quit are idiots.

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Bernanke puts RBA in a bind over future interest rate movements

Adam Creighton
September 20, 2013 12:00AM

A FEW stiff cups of tea were being poured in Martin Place yesterday, as monetary policy boffins digested the US Federal Reserve's shock decision to keep pumping $US85 billion ($90.7bn) a month into the US global financial system indefinitely, which pelted the Australian dollar above US95c to a three-month high, with the expectation of further increases.

Federal Reserve chairman Ben Bernanke smashed the expectation -- which he had created earlier this year -- that the US central bank would cease "tapering" this month, arguing the US economy was still too weak to tighten monetary policy.

News that the Fed intends to keep undermining the value of its own currency at the same pace presents the Reserve Bank of Australia with a dilemma: trim local interest rates even further to try to make the Australian dollar less attractive and risk stoking a local housing bubble, or don't and see the currency rise back to parity and beyond.

The Reserve Bank has repeatedly welcomed the slump in the Aussie, from $US1.06 in April to US89c earlier this month, because it helps stimulate the struggling non-mining sectors of the economy without pumping up house prices to unsustainable levels.

Indeed, RBA officials are already dousing talk of a housing bubble at home.

Credit growth remains weak but capital city house prices are rising at an annualised pace of about 10 per cent; rock bottom interest rates have prompted a stampede of investors into the housing market.

Modern monetary policy emphasises transparency and the importance of managing household and business expectations in advance of actual policy statements in order to avoiding destabilising gyrations in prices.

So much for that.

Some will caution the RBA against cutting rates to influence the Australian dollar: monetary policy here appears to have had negligible impact on the value of the local dollar, but plenty of impact on house prices.

The currency barely budged after governor Glenn Stevens trimmed the cash rate to 3 per cent in May. It began to tumble only after the US Federal started making sounds about tapering.

Read more: http://www.theaustralian.com.au/business/markets/bernanke-puts-rba-in-a-bind-over-future-interest-rate-movements/story-e6frg916-1226723132935
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Rising tides will lift the RBA’s rates

Stephen Koukoulas

Australia’s financial system is in sound shape, with the main risks coming from offshore and maybe housing, although on the latter point the Reserve Bank is comfortable with the current state of play in lending and household finances. Those were the key points from the Reserve Bank’s semi-annual Financial Stability Review.

While the release of the FSR is not usually a market-moving event, this one contains a number of issues which has some potential policy implications.

While the financial system remains strong, the Reserve Bank noted that “the relatively modest rate of growth in credit, and hence bank balance sheets, poses a strategic challenge for Australian banks. Of particular importance is that banks maintain prudent risk appetite and lending practices, especially in the current low interest rate environment”.

In other words, the Reserve Bank is on alert for any unwelcome relaxation in lending standards which banks may pursue, given sluggish growth in the banking sector’s balance sheet.

According to the Reserve, there are few signs of this occurring at the moment. But like an air traffic controller surveying the radar, it is on the lookout in case conditions change.

The RBA noted the strength of household finances, saying that “the higher rate of saving and slower pace of credit growth have been in place for some time now, although surveys of households suggest that their risk appetite has increased a little, as would be expected in an environment of low interest rates and recovering asset prices”.

This suggests the Reserve Bank may be increasingly uncomfortable with the current level of interest rates. Or perhaps the Reserve is hinting that the current easy stance of monetary policy has worked in supporting growth and spending and that no more interest rate cuts are needed. Either way, the market should be preparing for the start of an interest rate hiking cycle at some stage within the next six months.

This assessment is only reinforced by the board noting in the FRS that “the risk profile of new household borrowing remains reasonably sound and indicators of household financial stress are low. The continued high rate of excess repayments on home loans is consistent with low rates of financial stress among households with mortgages”.

In a warning that has been delivered by the Reserve Bank over several decades, it noted that “it is important that those purchasing property do so with realistic expectations of future dwelling price growth”. In other words, the recent acceleration house price growth may not or will not be sustained over the medium term, especially when interest rates return to more normal levels, some 100 to 200 basis points above current rates. The bank is saying house prices can go down as well as up.

Perhaps the main aspect of the Reserve Bank's FSR was – and it is worth quoting at some length with my emphasis added – that because of subdued credit growth, “banks are therefore having to adapt to an environment where their balance sheets grow more in line with borrowers’ incomes and the broader economy. It is important that they do not respond to pressures to boost revenue by imprudently loosening their lending standards, or by making ill-considered moves into new markets or products. Based on the available evidence, these responses do not appear to be occurring at this stage”.

Currently, the banks are prudent. They implicitly have an eye on the lessons of the financial crisis. The Reserve Bank has no concerns that the Australian banks are going down the path of slack and adventurous lending, as was the case in the US and UK prior to the crisis.

Australia’s banks have been well managed, well regulated and have benefited from many years of pragmatic and prudent macroeconomic policy management.

With the Reserve and the regulators flagging risks (and the banks hopefully heeding this advice), it is likely that the financial system will remain healthy for some time to come.

The economy is doing well and the financial system is in good shape. That said, the Reserve Bank knows that this owes a lot to very easy monetary policy settings that have been in place for the past year or so. While there is no overt comment on the monetary policy outlook in the FRS, a close reading of the whole document should lead one to an assessment that the bank has a scenario in mind where interest rates will need to rise. The only questions are when and by how much.

Read more: http://www.businessspectator.com.au/article/2013/9/26/economy/rising-tides-will-lift-rbas-rates
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Inflation no hurdle for rate cut

September 30, 2013 - 10:37AM

Inflation is expected to remain benign despite the weaker Australian dollar, giving the Reserve Bank scope to cut the cash rate further if needed.

The TD Securities/Melbourne Institute Monthly Inflation Gauge rose 0.2 per cent in September, following a 0.1 per cent rise in August and an increase of 0.5 per cent in July. The rate for the 12 months to September was 2.1 per cent.

Underlying inflation is expected to remain in the bottom half of the RBA’s two-to-three per cent target band to the end of the year, TD Securities head of Asia-Pacific research Annette Beacher said.

‘‘We forecast underlying inflation to rise by 0.5 per cent in the quarter, for an annual rate of 2.1 per cent,’’ Ms Beacher said. ‘‘Although early signs of a pass-through of the weaker currency into imported prices are apparent and bear close watching.’’

Although the RBA was widely expected to keep the cash rate at 2.5 per cent when it meets tomorrow, it would be ‘‘prudent’’ if the RBA’s October statement referred to an easing bias, Ms Beacher said.

Read more: http://www.smh.com.au/business/the-economy/inflation-no-hurdle-for-rate-cut-20130930-2une3.html
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rates on hold
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Westpac Chief Economist Bill Evans reckons rates are on hold.....

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The Reserve Bank Board meets next week on October 1. We expect that the Board will decide to hold rates steady at that meeting.

In the minutes for the September Board meeting it was made quite clear that the October meeting would not be a “live” meeting. Consider the following quote from the minutes, “Members agreed that the Bank should again neither close off the possibility of reducing rates further nor signal an imminent intention to reduce them”. That suggests that there is little chance of an October move although the board clearly retains an easing bias. Note in particular that the minutes pointed out that the Australian dollar is “still high” and that “some further decline in the exchange rate would be helpful”. At the time of the September Board meeting the AUD was around USD 0.90¢. It has subsequently moved to around USD 0.94¢ so should, based on the quotes from the September minutes, be quite frustrating for the Board.

Of course, the big development around the AUD was the decision by the US Federal Reserve to maintain the same level of bond/ mortgage backed security purchases rather than taper back some of these purchases. Given the response of the AUD to the “taper talk” from May (USD 1.035) to June (USD 0.89¢) it is hardly surprising that the AUD jumped sharply on the news of “no taper”. Furthermore we expect that there will be no tapering in 2013. The October 29/30 meeting will be too close to the Debt Ceiling debate in the US Congress while the Fed is likely to have to further reduce its growth forecasts for 2013 and 2014 in December – hardly backdrops for the beginning of a tapering process. Consequently to the degree that the RBA Board is committed to a more competitive AUD it will have to be conditioned to not having Fed policy as a helpful support.

It is generally accepted that a central bank should not target its currency with interest rate policy. However, I am sure that the RBA would see the fall in the AUD through May to present (USD 1.03 in early May) as being partly due to its rate cuts in May and August and the maintenance of a consistent easing bias. We concur that while the concerns for a hard landing in China and “tapering” were the key factors behind the fall in the AUD the rate cuts and easing bias policy were helpful complements.

Domestic conditions also support lower rates. Consider the Bank’s subdued commentary in the September minutes around the domestic economy: “firms’ capital expenditure plans for non-mining investment remained subdued for the coming year”; “mining investment was likely to decline noticeably”; “growth of household consumption … had been below average … and liaison contacts reported that retail sales growth had been only modest in recent months”; “labour market conditions remain somewhat subdued … (and there was) a decline in the employment to population ratio”; “there were further signs that wage growth had eased over the year”.

The Bank’s Financial Stability Review was released on September 24. The tone of the Review was quite balanced. “Of particular importance is that banks maintain prudent risk appetite and lending practices, especially in the low interest rate environment”. The Bank notes “the risk profile of new household borrowing remains reasonably sound and indicators of household financial stress are reasonably low” and there is “a continued rate of excess repayments on home loans”. Indicators of household stress provided no grounds for concern. The non performing share of banks’ housing loans was steady at 0.7%; data on securitised housing loans suggests arrears rates have fallen since peaking in mid 2011. Lending standards are assessed as having been broadly maintained since late 2011. The distribution of high LVR share of loan approvals has shifted down since 2009. The share of low doc loan approvals has remained steady at 1% in 2013.

Self Managed Superannuation funds (SMSF) come in for scrutiny, as representing a new source of housing investor demand. My point would be that these investors should be put into perspective. Residential real estate assets represent around 3.5% of the SMSF’s investments – around $20bn in assets. That represents around 1.5% of total housing credit outstanding and around 5% of investor credit. With such a low share of the stock it seems highly unlikely that the SMSF sector could significantly influence prices through its flow.

There was only limited commentary on house prices. Prices have increased by 4.5% since the Reserve Bank started cutting rates in November 2011. If we compare that profile with the previous three easing cycles we can see the moderation in this cycle compared to previous cycles. Some 21 months after the first rate cut in previous cycles prices were up by 15.5% (2008/9); 37% (2001/2) and 17.4% (1996/97). The question is whether there are aspects to today’s economy that can explain the muted response of prices, so far, in this cycle.

Of most importance is the attitude of Australian households to leverage. In the Stability Review the Reserve Bank points out that 50% of mortgage borrowers have maintained their mortgage repayments despite mortgage rates falling by nearly 2%. They have also built up mortgage buffers through mortgage offsets and redraw facilities of 14% of balances – 21 months of scheduled repayments.

Concerns over debt levels and job security are likely explanations for this behaviour. The Westpac Melbourne Institute Index of Consumer Sentiment has recovered back to around its early 2007 level. However how respondents feel about their job security is still 20% lower. It is unusual for that wedge to have opened up since, typically, confidence and job security are closely aligned.

In this current cycle “job security” is aligned with “business conditions” as measured in the NAB Business Confidence survey – this measure is also around 20% below the 2007 levels. Households’ confidence to leverage into a strong property boom will be affected by their assessments of job security and perceptions of debt levels. Note that the savings rate actually increased in the June quarter indicating that the consumer remains cautious.

The RBA Board will have to balance potential “bubble” risks, for which there is little evidence after 21 months, with the obvious advantage lower rates imply for a lower AUD and a boost to domestic activity. We think they are likely to opt for another cut in November.
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stinkbug
20 Sep 2013, 09:10 AM
My guess is no change, although the interbank implied yield dropped yesterday.

http://www.asx.com.au/data/trt/ib_expectation_curve_graph.pdf

I said no change - but I really think it could go either way. There's a lot happening globally - so I think they may hold off until things settle.
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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House price fears will prevent rate cut: Citi

PUBLISHED: 27 Sep 2013 10:33:28

The Reserve Bank of Australia will be unable to cut rates out of fear of accelerating house prices, according to Citibank, which suggests global investors avoid Australia.

“In Australia, we foresee policy stability from the RBA, which is now hamstrung by rising house prices and a rising AUD,” the bank’s economists argue in a note.

Citi forecasts the official cash rate to stay at 2.5 per cent until the third quarter of 2014 when it will rise to 2.75 per cent.

Without a cut in the cash rate or a fall in the dollar it may be difficult for the non-mining parts of the Australian economy to take off as mining investment falls.

Read more: http://www.afr.com/p/markets/house_price_fears_will_prevent_rate_WT78SBbjrsvwxnAa86qA6K
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Don't bank on another RBA rate cut

September 30, 2013 - 12:41PM
Michael Pascoe

When the minutes of tomorrow's meeting are released, they're likely to record that the economies of our key trading partners have mostly continued to improve. In particular, all the scaremongering about a hard landing in China has receded as a wonderful growth rate of about 7-and-a-half per cent is confirmed. The ripple of headlines about capital flight from some emerging markets has faded, helped somewhat by the US Federal Reserve's dithering over tapering. Europe's mess is no worse and is in some ways a little better, Italian politics notwithstanding.

The threat of financial market instability induced by a possible shutdown of the US government is there, but that doesn't scare us as much as it used. Having been to the brink before, the view over the edge isn't quite as scary. Besides, the threat is not without some benefit to us while it's credited with weakening the Aussie a touch.

So the international picture does not provide an argument for an easing bias, let alone an actual cut.

Domestically, the news also has been mostly positive while the negative bits were already factored in. The big transitional bet on domestic housing continues to head in the right direction as lower interest rates do their stuff – firming prices and thus encouraging more building, albeit not enough. And, as the RBA continues to remind us, it's still early days for the full impact of the last couple of interest rate cuts to work their way through the system. Besides, the RBA would look a little silly cutting rates again to further stimulate housing when it's also firing warning shots about lenders and borrowers being in danger of getting carried away. (Not that there is a bubble, far from it, as I'll get to just a little later.)

Yes, the labour market has remained soft, but that is as expected and no surprise. Indeed, the RBA credits a continuing weak labour market over the rest of this financial year with keeping inflation down even as the Aussie weakens. No surprise or change of outlook over the unemployment rate then.

Retail sales statistics also have been soft and tomorrow's ABS count of August sales won't be good, but industry liaison is likely to tell the board that there has indeed been an election-related pickup this month. The business and consumer confidence lift in anticipation of a change of government has carried through after the event.

(Heck, there have even been some unexpected bonuses with the AFR reporting that the government is scrapping the October 1 crackdown on some of the banks' tax avoidance games. And for a little while there, it seemed there might have been a whole new level of stimulus: classifying weddings costs as a business expense. The Attorney-General seems to think that's still a possibility.)

More importantly for the bigger policy picture, the Tweedle Dees of the new government are maintaining the same sort of stimulatory fiscal policy as the previous Tweedle Dums, so the risk of a negative shock there has receded.

Our banks are officially strong and have money to lend if people and businesses want to borrow more, which the confidence thing and the housing pickup should in time encourage them to do.

So all that lot points to rates remaining steady tomorrow and for quite some time. The only negative over the past four weeks has been the Australian dollar's rise on the Federal Reserve delaying the start of tapering – but that's about them, not really about us, and it is only a delay.

Thus tomorrow's should be one of the easier board meetings with the main interest for members not being about maybe trimming rates, but just what seeds have been sown for a rate rise sometime next year.

It is entirely reasonable for the RBA to fire warning shots when it spots potential problems developing – and it's wise to take heed of those warnings. Yet the extrapolation of those warnings and some prices rises into talk of a housing bubble has been somewhat inflated, so to speak. Inner-Sydney and Perth do not represent the entire Australian housing market, and even in those two distinctly warm geographies, all might not be quite what it seems.

Brisbane property analyst Michael Matusik is one of the calmer residential real estate voices, both on the way up and the way down. His latest post seeks to blow the froth off the bubble talk and is worth quoting at some length for a different perspective:

For the record, Sydney house prices are up 8.3 per cent over the past 12 months according to RP Data, but were up only 1.2 per cent last year and were down 2.4 per cent in 2011. As for the rest of the country, Perth is up 7.9 per cent for the year but down 0.5 per cent last month while Melbourne is up 5.4 per cent for the year and the Brisbane-Gold Coast region is up a measly 1.8 per cent.

Hmmm, a housing bubble indeed…It was just two months ago, when we were still waiting for Australia's housing market to bust. For mine, what we are experiencing is the normal machinations of the property cycle – nothing more, nothing less.

Read more: http://www.smh.com.au/business/the-economy/dont-bank-on-another-rba-rate-cut-20130930-2unp7.html
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Can I change my mind? I think they may cut again to get the AUD down instead of holding fire.
Even at the risk of supercharging the Syd property market.
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