This morning eyes turned to a land down under to see what the Reserve Bank of Australia would do. It will have been no great surprise to regular readers as this hit the newswires.
At its meeting today, the Board decided to lower the cash rate by 25 basis points to 1.00 per cent. This follows a similar reduction at the Board’s June meeting.
There are a lot of perspectives here but let me start with the point that it is getting ever harder to find any country with any sort of positive interest-rate. Even Australia with an economy cushioned by its enormous commodity resources cannot escape the trend to ever lower interest-rates that looks ever more like this.
Glaciers melting in the dead of night
And the superstars sucked into the super massive
Super massive black hole
Super massive black hole
Super massive black hole ( Muse)
There was a time that Australia was able to stand apart from this trend due to its ability to essentially dig money out of the ground. Actually if we take a look at The West Australian we can see that in fact this continues to boom.
Australia’s commodity exports earned a record $275 billion over the past 12 months, and another record is tipped next year.
Officials are scrambling to adjust their forecasts to account for the unexpected boom, with high iron ore prices driving the strong figures.
So a setback here was not the cause of the double cut in interest-rates and in case you are wondering why Iron Ore prices are booming as the world economy slows it has been caused by this.
The impact of the tailings dam collapse at one of Vale’s iron ore mines in Brazil this year, which led to a sharp fall in Brazilian iron ore exports, looks set to last at least two years.
This means that the situation in this area is not only rosy for Australia but looks set to be so.
It means the seaborne iron ore market is likely to remain tight, and prices elevated, at least until 2021, and Australia is the main beneficiary.
Official forecasts for resource and energy commodity earnings in 2019-20 have now been revised up by $12.9 billion to $285 billion, which would be another record.
What does the RBA say?
As we find so often the statement accompanying the announcement is somewhat contradictory. Let me show with this.
This easing of monetary policy will support employment growth and provide greater confidence that inflation will be consistent with the medium-term target.
But why does employment need supporting when later we are told this?
Employment growth has continued to be strong. Labour force participation is at a record level, the vacancy rate remains high and there are reports of skills shortages in some areas.
But wait there is more.
The strong employment growth over the past year or so has led to a pick-up in wages growth in the private sector, although overall wages growth remains low. A further gradual lift in wages growth is still expected and this would be a welcome development.
Back in the day central banks explained interest-rate increases like this! The situation gets even more bizarre as we note this.
Taken together, these labour market outcomes suggest that the Australian economy can sustain lower rates of unemployment and underemployment.
If we look at the latest data from Australia Statistics we are told this.
Employment increased 28,400 to 12,856,600 persons
It’s chart shows us that this has risen from just over 11.5 million five years ago. Over the same period the unemployment rate has fallen from 5.9% to 5.2%.
Why did they cut then?
On a superficial level there is a case from the inflation target. Here are the inflation numbers from Australia Statistics.
was flat (0.0%) this quarter, compared with a rise of 0.5% in the December quarter 2018……rose 1.3% over the twelve months to the March quarter 2019, compared with a rise of 1.8% over the twelve months to the December quarter 2018.
Except if they push it higher to 2% then as “overall wages growth remains low” they will reduce real wages and make things worse for the ordinary person. Unless of course the wages fairy turns up and we have learnt that he or she has been in rather short supply in the credit crunch era.
However there is this from the RBA.
Conditions in most housing markets remain soft, although there are some tentative signs that prices are now stabilising in Sydney and Melbourne. Growth in housing credit has also stabilised recently.
This is typical central banker speak as we note they invariably avoid any mention of pries falling or declining so we get euphemisms like “soft” and “stabilised”. The subject is obviously too painful for them. If we look at the situation then Australia Statistics gave us some insight on Thursday.
Residential real estate experienced its fifth consecutive quarter of real holding losses.
This has led to this.
The ratio of mortgage debt to residential real estate assets was 29.0, up from 28.1 in the previous quarter, indicating that mortgage debt grew faster than the value of residential real estate owned by households. The rise reflects falling residential property prices rather than strong growth in mortgage debt.
If we switch to the latest house price data then you can see for yourselves about the claimed tentative stabilisation in Sydney and Melbourne.
All capital cities recorded falls in property prices in the March quarter 2019, with the larger property markets of Sydney (-3.9 per cent) and Melbourne (-3.8 per cent) continuing to observe the largest falls……..Through the year growth in property prices fell 10.3 per cent in Sydney and 9.4 per cent in Melbourne. Adelaide (0.8 per cent) and Hobart (4.6 per cent) are the only capital cities recording positive through the year growth.
As to the RBA it will have mixed views on this from the Sydney Morning Herald.
The National Australia Bank, Commonwealth Bank of Australia and Westpac will not pass on the full benefit of the latest Reserve Bank interest rate cut to all of their home loan customers.
In response to the Reserve Bank’s move to cut the cash rate from 1.25 per cent to 1 per cent on Tuesday, NAB said it would cut all of its variable home loan interest rates by 0.19 percentage points.
On the one hand not all the easing is flowing into mortgage-rates but on the other thee rest will help “The Precious”.
Comment
There are two main issues here. The first is that as Australia cuts its interest-rates to a record low it is joining a trend and theme which just builds and builds. Perhaps the maddest example of this has popped up this morning.
Italy 2 year yield falls below 0% ( @mhewson_CMC )
So being the South China Territories has bought some time but appears to have only delayed the inevitable. The catch is that if it did any real good the places that preceded Australia on this road to nowhere would have recovered by now, but they just look to cut further. Whereas I would be mulling the response of the ordinary person as highlighted by the Sydney Morning Herald.
“Two months in a row to have a drop like that, it’s just fuelling the uncertainty,” Mr Chapman said.
“It just scares me we’re going down the same road as the global financial crisis, which means chaos. And if I see chaos on the radar, I want to have enough money behind me to see me through.
If other people think that then we see a mechanism which makes things worse and not better. A case I have been making for some years now. However the Governor feels the need to hint at even more.
Given the circumstances, the Board is prepared to adjust interest rates again if needed.
Odd that as in the speech he has just given in Darwin you could think that the economy is in fact going rather well.
Second, Australia’s terms of trade have risen again, largely due to higher iron ore prices. Investment in the resources sector is also expected to increase over the next few years…..Third, the exchange rate has depreciated over the past couple of years and, on a trade-weighted basis, is at the bottom end of its range of recent times…..And fourth, we are expecting stronger growth in household disposable income over the next couple of years,
The next issue is one of timing as we were on the case last September 4th.
So there has been a clear credit crunch down under which of course is related to the housing market changes. This is further reinforced by the narrower measure M1 which has stagnated so far in 2018. Much more of that and the RBA could either cut interest-rates further or introduce some credit easing of the Funding for Lending Scheme style.
So what have they been doing for the last ten months? This is even worse when we remind ourselves that monetary policy is supposed to lead not lag events. As we see so often they seem to have leapt from complacency to panic.
Looking Ahead
As it happens the situation with M1 growth is the same one of stagnation or around 0.1% higher than a year ago. Thus I doubt this rate cut is the last and still think a Funding for Lending Scheme or something similar is on its way.
Notayesmanseconomics's Blog 
I like the observation that the Wages Fairy is so seldom sighted these days that we don’t even know its gender. I’m guessing it knocks about with the Inflation Target Fairy and the Above Inflation Deposit Rate of Interest Fairy.
unfortunately all Mark has is pixie dust – and we know how unreliable that can be…
forbin
I’ve had a look at the iron price and I’ve noticed that on the 2nd of January this year one UK £ got you 1.26 US $. It was about the same on the 1st of July. The price of Iron Ore during that period has gone from $65.98 to $119.45 for a ton.
There must surely be some products that will begin to see a pass through of inflationary prices increases from that?
And if there is they’ll be taken out the inflationary measuring basket and replaced with something made out of wood. (so long as the price of wood remains static).
Terms of trade. The A$ has been steadily weakening which is the converse of what one could expect from rising base and more recently precious metals but is in line with falling rates. This is a fabricated situation given rising mining revenues and the fact that the ZLB has almost been reached rendering looser monetray policy ineffective. Can this really last?
Hi Adam
Yes the currency situation this time around is the reverse of what became called the Dutch Disease. To can this last? The problem is that pretty much is being thrown at this with a lower currency, lower interest-rates and a boom for the commodities produced.Bond yields have fallen faster than if they had introduced QE as well, So what are they so afraid of?
Thanks for the heads up on that iron ore Vale disaster/ Fortescue benefit connection. China stockpiling on oil, coal, copper, iron ore etc is somewhat of a “state” mechanism requiring “feet on ground”, Baltic dry index confirmation and processing potentially “stale” information when making a market “bet”. Sudden- insider- after the fact credit clamp down information on importer/stockpilers can roll the market. I see it as to easy to manipulate. Ask the forensic accounts at Noble House!!!
Morloch data geeks (time derivative futures/options-yes bahhhhd reference) don’t like unconfirmable risks. It’s strictly personal thing. Watching this week:
1. Indian monsoons (some blog interest there)
2. CME wild west lumber futures-just watching- cash settlement date issues-many “pulling” players-high risk for “Monty python lumberjack song” people- supply/demand more technically possible to analyse
3. Semi conductor over-capacity- falling cell phone sales- time for a mandatory software upgrade to make your old cell phone non functioning.
No comment on the woman’s us/england soccer game- I expect “exceptional” referees. Cheers/beers on the game!!
Hi Canuckistinian
Just when you thought you had seen it all.
Although the topic was Australian interest rates what is going on in Australia has ramifications elsewhere.
Australia avoided most of the credit crisis a decade ago and house prices risen at an rapid rate now we are seeing house prices fall while the rest of the world is seeing a slowdown. Little wonder they have cut interest rates further imo worldwide worries about debt and a global slowdown is likely to affect Australia sooner or later imo.
In the UK today we had awful construction PMI figures which missed forecasts by a massive amount all sectors suffered including housing:
https://www.theguardian.com/business/2019/jul/02/uk-construction-industry-housebuilders-brexit
After the poor manufacturing PMI yesterday the UK will be looking to cut interest rates further imo.
I read a report earlier about South Korea which stated some firms think its already in recession:
https://www.euronews.com/2019/07/02/for-some-firms-south-koreas-economy-feels-like-its-already-in-recession
UK gilt yields fallen further today whish suggests the next UK rate move will be down. The UK not yet fallen to negative yields however I think they are on the cards sooner or later.
Danny Blanchflower retweeted earlier David Rosenberg:
“Short-lived market response to the G-20 hug and kiss moment. Steve Bannon wasn’t wrong when he said this is bigger than the Cold War. Meanwhile, the global PMI is below 50 and down to a seven-year low. No catalyst in sight for a reversal, either.”
Global PMI bellow 50 says it all!
If ever there were signs of a global recession its now with interest rates falling around the globe and negative rates at that!
oh golly gosh Peter ! what are the CB’ers supposed to do ?
it’s crazy , here we are 11 years into a emergency of epic proportions with interest rates at historic lows
and all out IR reductions are all they can think of ? and QE 27 -n
me thinks there’s something rotten in the state of Denmark!
group dementia just doesn’t do this issue justice !!
It’s a Mad, Mad, Mad, Mad World (1963) – Every Man for Himself Scene
forbin
Another problem for the UK just reported on the BBC warehouses are already full and no space left for stockpiling with a no deal BREXIT. I think TESCO warned about such an event when they reported their results, they said in the Autumn all available space was needed for Christmas stock and there would be no space to stock pile for a no deal BREXIT:
https://www.bbc.co.uk/news/business-48843038
Not a good situation at the moment and one which the markets are ignoring.
peter, stop fretting
sit back and have some popcorn – the show is going to be “entertaining” to say the least 😉
forbin
some cat videos to help relax to
Great blog as usual, Shaun.
The Reserve Bank of Australia is the only G20 central bank that targets an inflation indicator with a net acquisitions approach to owner-occupied housing, the Australian CPI, so is top of the class in that respect. However, it does fall down in its choice of target rate. Like the Reserve Bank of New Zealand, it has a target range, rather than a point target rate. However, the RBNZ has a target range of 1% to 3% and its Point Targets Agreement with the Government adds “with a focus on keeping future average inflation near the 2 percent target midpoint”, so it isn’t so different from the Bank of England’s 2% point target. The RBA’s target range is 2% to 3%, which implies a 2½% midpoint, except there is nothing about this in the 2016 Statement on the Conduct of Monetary Policy signed by the Treasurer and the RBA Governor. So presumably if the average inflation rate were 3% over the period covered by the Statement, the RBA would have done its duty as far as maintaining “the stability of the currency of Australia” is concerned. This looks way too lax. As you point out, most of the economic indicators don’t suggest any need for an interest rate cut. However, if the current inflation rate is 1.3%, this looks way too low given the RBA’s target range, even more so if the point target in the central banker’s head is 3%.
Belated happy Canada Day! (The verb “se faufiler” means “to dodge” in French, and is similarly used in a negative way when speaking of a lover, rather than a hockey forward.)
Hi Andrew and a belated Canada Day to you as well.
Whilst central banks still talk as if they are inflation targeters I note the order below in today’s RBA statement.
“The Board will continue to monitor developments in the labour market closely and adjust monetary policy if needed to support sustainable growth in the economy and the achievement of the inflation target over time.”
Of course as it happens it is easier for it to say it is aiming for the inflation target. We also know that the definition of the medium-term can be flexible too.
“The inflation target is defined as a medium-term average rather than as a rate (or band of rates) that must be held at all times. ”
You are right to point out that house prices are in the CPI and that we should welcome that. My only concern is that the net-acquisitions system leads to a weight of only 7.8%.
Thank you for your reply. Yes, the Australian CPI uses the “net weight, net price” approach to measuring net dwelling acquisitions, so that both the expenditure weights and the price indices relate to dwellings. The December EU decision, after years of having the EEA members calculate “net weight, gross price” indexes, where the prices related to dwelling and lot combined, suddenly came down on the “net weight, net price” side, it would seem entirely on theoretical grounds, which made one wonder what the previous 18 years had all been about. I agree that the weight is too low based on dwelling acquisitions only. At least in Australia most dwellings are sold separately from their lots, so for them a “net weight, net price” approach is more doable than it is for the euro area. Very scary that the new ECB Governor who will have to try to untangle this mess will be Christine Lagarde.
All it’s about is keeping the property bubble from imploding, same as it ever was…………….
indeed kevin , all western economies are hell bent on asset price inflation
the only way is up
and lets not forget more billionaires in the good old US of A
still are we going to get anywhere when the majick pixie dust of IR is almost out ?
will the CB really go for broke and pay for us to borrow ?
do they know the risks?
do they care?
time for out of the box thinking ? group dementia is hard to break …….
Forbin
Forbin
“all western economies are hell bent on asset price inflation
the only way is up”
They are but nothing goes up forever what goes up must come down at some stage. My simple view of economics tells me if assets ballooned out of proportion to debt then at some stage it will burst.
As debt has got out of control it used to be dealt with by raising interest rates now they are going negative its a new world in economics to my way of thinking and I don’t know where it will end up.
There are various theories when growth slows and debt is too high one being create growth to hopefully repay the debt the other being a default and the latter causes much pain someone has to take the hit.
If there are any more theories let me know?
The idea that we can carry on with a materialistic life style forever without suffering pain in a capitalist world is an illusion imo.
indeed , just an illusion , but everyone is in their own bubble so collective delusion or perhaps dementia ?
Forbin
PPan,
Quite simply their plan is that savers(who have born the brunt of the cost and the pain of the GFC bailout for the last ten years) will again be punished for being so responsible and frugal, the central banks aim to simply inflate away the debt thereby destroying the savers hard earned at an even faster rate than they have been, there is no way that borrowers(principally mortgage debt) will be allowed to fail as the banks would suffer, and as has been proved on so many occasions the precious always come first.
So yet again the house buying zombies will be rewarded, those who borrowed the most will gain the most, those who were cautious and saved a large deposit and borrowed less than the maximum, or even told the truth about their earnings when making the application for the mortgage-how outdated and old fashioned!!!, will make far less, and those renting will, like the man chasing the mirage in the desert, see their prospective house slip further and further into the horizon.
Quite remarkable that Australia with a fairly low population, who have had the rest of the world handing them easy money via China’s need to buy their metals and fuel sources for the last 3 decades to produce manufactured goods … in a boom the human race may never see again …. and all they’ve managed to do is create a debt and housing bubble that now needs ZIRP to survive.
It truly is incompetence of epic proportions.
Or perhaps it is simply down to the fact that central banks now run countries not politicians?
It’s quite extraordinary, everybody knows Einstein was a half wit but he seems to be correct about one thing (I accept he had a few other lucky guesses). All central bankers are all doing the same thing and expecting different results. Of course it will be different this time.
Hi bill40
Your comment reminds me of the famous question posed by Napoleon Bonaparte
“I know he’s a good general, but is he lucky?”
Very good!
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