This morning as the world waits on tenterhooks for news on the US election there was yet another move in one of the longest running themes of my work. For that we need to travel to what is often called a land “down under” or more recently the South China Territories. So let me hand you over to the Reserve Bank of Australia.
The elements of today’s package are as follows:
- a reduction in the cash rate target to 0.1 per cent
- a reduction in the target for the yield on the 3-year Australian Government bond to around 0.1 per cent
- a reduction in the interest rate on new drawings under the Term Funding Facility to 0.1 per cent
- a reduction in the interest rate on Exchange Settlement balances to zero
So we see yet another interest-rate cut in this instance from 0.25% to 0.1% which means that we have gad around 770 in total now since the credit crunch began. There is something very curious about this action because you see that apparently things are going really rather well.
Encouragingly, the recent economic data have been a bit better than expected and the near-term outlook is better than it was three months ago.
Indeed you might also think that as this rate cutting cycle began in June last year when the rate was cut from 1.5% to 1.25% you might wait for its impact to hit, at least if you believe it will have any. After all there were cuts two months in a row meaning a 0.5% cut which should be impacting now. If they do not work how will one of less than a third of the size?
The theme above has become something of a central banking standard where they tell us things are better than expected but cut interest-rates anyway! But I do not see others calling them out for it. After all if you are the South China Territories then this is rather bullish.
The global economy has been recovering from the initial virus outbreaks, with the recovery most advanced in China.
I am sure you have spotted that the trend to more QE is in force as well. It always goes longer in time in line with my “To Infinity! And Beyond!” theme.
Under the program to purchase longer-dated bonds, the Bank will buy bonds issued by the Australian Government and by the states and territories, with an expected 80/20 split. These bonds will be bought in the secondary market through regular auctions, with the first auction to be held this Thursday for Australian Government securities.
As well as going longer there is always “More! More! More!” as a theme too as the extra 100 billion Australian Dollars is only a starting point.
The Bank remains prepared to purchase bonds in whatever quantity is required to achieve the 3-year yield target. Any bonds purchased to support this target would be in addition to the $100 billion bond purchase program.
Of course if you are going longer and presumably feel that is a good idea then why bother keeping the 3-year yield target? But the central planners never seem to give anything up once they have gained control.
The Aussie Dollar
We do get a bit of a divergence from the central bankers rule book with the bit I have highlighted below.
The combination of the RBA’s bond purchases and lower interest rates across the yield curve will assist the recovery by: lowering financing costs for borrowers; contributing to a lower exchange rate than otherwise; and supporting asset prices and balance sheets.
So we have an actual attempt at devaluation or more strictly exchange-rate depreciation. Of course President Trump may be about to depart but should he stay will he be looking at Australia as looking for an economic advantage via a weaker exchange-rate?
If we look at the Trade Weighted Index it’s recent peak was at 65.7 at the end of January 2018. It then gently declined towards 60 and then plunged to around 50 as the pandemic hit. So there was a substantial depreciation,although with economies plunging any economic gains were likely to be small. The index then bounced to a bit above 62 in August and was 59.5 yesterday.So there was and indeed is no clear case for needing a depreciation especially if you are benefiting from some re-stocking by China.
So far this year, Australian exports of iron ore and liquefied natural gas to China have increased by eight percent and nine percent respectively year on year, according to Wood Mackenzie. China’s coal imports from Australia also far exceeded the levels before the pandemic. ( CGTN from the 28th of July).
I see that the Australian Broadcasting Corporation has been on the case already.
Adelaide homeowners Mark and Verity Riessen are eagerly waiting to see how much of the rate cut will be passed on to them by their lender.
“The last rate cut the RBA passed through, was not passed on to us by our lender,” Mr Reissen said.
So the banks have behaved like well banks in not passing on the previous interest-rate cut and that is a theme. What do I mean by that? As interest-rates have approached and then in some places gone below zero the responsiveness or delta of the mortgage-rate changes has clearly declined. It always was important to check the terms of your mortgage but the ones saying linked to Cash Rate ( of the RBA) will be in prime position today.Also you need to check for exemptions as some around the world have (sneakily) imposed a minimum interest-rate.
According to the RBA the Reissen’s are at 3.2% paying what is pretty much the average rate with new mortgages being at 2.69% on average.
We only have numbers up until the end of June but here is Australia Statistics.
Weighted average of the eight capital cities Residential Property Price Index:
- fell 1.8% this quarter.
- rose 6.2% over the last twelve months.
The total value of residential dwellings in Australia fell $98.2b to $7,138.2b this quarter.
The idea that the number above is any sort of value is pretty much laughable as has there been a bid for the lot? But we see that the RBA may have been triggered by house price falls which central bankers hate.
The index is at 143.2 as opposed to the 100 of 2012.
Let us look at the reality of the situation. Starting with interest-rates if you are wondering what is the point of a 0.15% cut after so many you are on the right track and the psychobabble continues with this.
Given the outlook, the Board is not expecting to increase the cash rate for at least three years.
So more meaningless Forward Guidance although some seem fooled by it. From ABC.
Dr Hunter said the bank outlining it did not expect to raise the cash rate over the next three years would “provide households and businesses with some certainty over their individual borrowing rates in the near term”.
Perhaps someone should tell Dr.Hunter about the existence of fixed interest-rates! Also as the last interest-rate rise was a decade ago today who exactly expects any sort of interest-rate rise? The fact it was to 4.75% provides plenty of food for thought.
The reality is that central banks have two aims now and that is why we are seeing so much QE and credit easing. Aim one is to help government fiscal policy by keeping the rate at which it can borrow very low and also pumping house prices by reducing mortgage rates.
Meanwhile I know Halloween was a few days ago but this still chills the spine.
Dr Lowe also said the cash rate was very unlikely to drop below zero.