Tag Archives: interest rates

November 5, 2013 · 4:14 am

Strong dollar casts cloud over outlook

The strong Australian dollar is keeping the Reserve Bank of Australia on edge as it observes tentative signs of improvement in the non-mining sectors of the economy.

The central bank appears likely to hold interest rates steady well into 2014 as it tries to assess how competing forces – the boost to activity from record low interest rates against the depressive effects of a high dollar, rapidly receding mining investment and below-average global growth – will work on the economy over the next few months.

The RBA has taken heart from evidence that a string of rate cuts that have pushed the cash rate down to 2.5 per cent are biting, and households are shedding much of their recent caution and life is coming back into the housing and equity markets.

As evidence of this, it points to increased demand from households for finance and a shift among savers away from low-risk assets.

In a clear warning for those hoping for more official interest rate cuts, RBA Governor Glenn Stevens said that the full effects of the rate cuts made this year are yet to be felt.

But nor does the RBA seem to be in a hurry to hike rates back toward more normal levels.

Its chief concern is the continued strength of the dollar, which has sat around the 95 US cents mark for the past month.

At this level, Stevens said, it “is still uncomfortably high. A lower level of the exchange rate is likely to be needed to achieve balanced growth in the economy”.

The RBA’s ability exert influence on the exchange rate is minor – mainly through the interest rate differential between Australian and US official interest rates – but at the margin it could encourage the central bank to hold rates lower for longer.

Another argument to keep interest rates down is doubts about how durable recent improvements in non-mining activity may be. As Stevens admitted, although private demand outside the mining sector was expected to pick up, “considerable uncertainty surrounds this outlook”.

Another concern is the move by the big banks to begin inching up their lending rates, irrespective of the stable cash rate.

There is probably never a particularly comfortable time to be a central banker, but the next few months could be a particularly white knuckle time.

 

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October 23, 2013 · 1:01 am

Forget fuel spike – tame underlying inflation means no price fears for RBA

A surge in the cost of fuel (up 7.6 per cent) helped drive  a 1.2 per cent spike in headline inflation in the September quarter.

But if you want a clue to what the Reserve Bank of Australia will make of the Consumer Price Index, focus on the measures of underlying inflation, when the quarterly rise was a more moderate 0.65 per cent.

As a result, underlying inflation is sitting around 2.3 per cent – virtually bang on the RBA’s forecast.

There are a few things for the central bank to keep an eye on.

One is the growth in house prices as the long-awaited recovery in the housing market gathers pace. While slow wages growth may help constrain inflation in real estate, the RBA will be increasingly alert as time goes on to the risk (remote for now) that if interest rates are kept low for too long they could fuel risky borrowing. But this is a problem that is a long way off. Economics conditions are still too soft for there to be talk of a rate rise just yet.

The other main factor is the lower exchange rate, and the effect that has had on push up the cost of imports.

If, as expected,  the US recovery gradually reasserts itself after the debt ceiling madness of recent days, the dollar is likely to slide further.

Overall, there is little in the Consumer Price Index numbers that is unexpected, making a November interest rate move no more or less likely.

The behaviour of inflation has caused little concern for the central bank for some time now.

In its most recent forecasts, released in August, the RBA stuck by the outlook it outlined earlier in the year – underlying inflation to hover around 2.25 per cent (in the lower half of its 2 to 3 per cent target band) through to the middle of next year, and gradually rise to around 2.5 per cent thereafter.

It bases its benign outlook on its belief that all the forces acting on prices – some to force them up, some to force them down – collectively cancel each other out.

One of the big positives for households in recent years has been the strength of the currency, which has made imports (particularly clothes, electronics, cars etc) extraordinarily cheap and affordable.

But the dollar’s fall against the US currency in recent months (notwithstanding burst in dollar strength in the last couple of weeks), has seen this boost to household spending power fade.

So, if this was happening in isolation, the effect would be to force prices up.

But softness in the domestic economy, which has seen both economic activity and wages growth slow, means retailers risk quickly losing customers if they push up their prices too fast.

In the RBA’s judgement, the net effect of these opposing forces (a weaker dollar forcing the cost of imports up while a softening labour market and slower wages growth holds back consumer spending) on inflation will be negligible.

 

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August 5, 2013 · 2:07 am

Flat retail leaves rate cut door open

No wonder the Reserve Bank of Australia appears so comfortable with the inflation outlook.

When retail sales fail to grow in a quarter, and edge just 1.1 per cent higher in the course of a year, that tells you everything you need to know about the extent of consumer caution and a lack of pricing power among retailers.

For a central bank contemplating a cash rate cut to 2.5 per cent, the environment doesn’t get much more unthreatening than this.

And the RBA Board, when it meets tomorrow, will have to taker into account the market’s emphatic expectation that monetary policy will be eased.

But this rate cut will not be the political tonic that governments usually get from moves that make borrowing cheaper – this time around it is a potent sign of how soft conditions in the economy have become – and how much more work the RBA may yet have to do.

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July 31, 2013 · 3:30 am

Kevin or Tony, business grinds on regardless

At about this point before every federal election, someone comes out and complain that political uncertainty is undermining business confidence and hurting investment.

True to form, business leaders were reported by The Australian earlier this week crying that doubts over when the election would be held were “sabotaging jobs and investment”.

We are led to believe that right now across the country, company boards, HR managers and purchasing departments are in a fit of angst about the current state of political flux, delaying crucial hiring and investment decisions as they wait on the Prime Minister to make the short drive to Government House to call the nation to the polls.

If this is the case, it must be an excruciating time for job seekers, merchant bankers, car salesmen and just about anyone else with something to sell.

It would mean that every three years or so – whenever an election looms – economic activity is brought to a virtual standstill as the nation awaits the verdict.

Problem is that, as with much received wisdom, it doesn’t stand up to much scrutiny.

Even a cursory inspection of official investment and employment figures suggests little correlation between election timing and swings in activity.

For instance, in the months leading up to the November 2001 election, private capital expenditure was regaining its momentum after having been savaged by the tech wreck. By the end of the year it had reached annual growth rate of almost 5 per cent – a 10 percentage point turnaround from the March quarter.

And again, in 2004, capex growth slowed in the three months to June to an annual rate of 2.5 per cent before accelerating sharply in the second half of the year to reach above 12 per cent in the December quarter – right when the election was held.

Of course, it has not all been one-way traffic.

Business investment was on a prolonged slide in the months leading up to the March 1996 election, when the Keating Government was dumped in a landslide.

But even here, other factors seemed to be at play.

Quarterly investment growth actually bottomed out the previous June (when it virtually stalled), and strengthened in the six months leading into the election. Maybe it was just that business was confident a change of government was on the cards.

The labour market similarly provides little support for the theory.

Just take these two examples.

In lead-up to, and aftermath of, the fractious August 2010 election, uncertainty about who would form government, and on what terms, was at an all-time high.

But throughout this extremely unsettled period, covering March to October, an extra 180,000 jobs were created, and total employment grew 1.6 per cent.

In 2007, the unemployment rate hovered at or below 4.3 per cent for the six months leading up to the November election, and rose only marginally to 4.5 per cent at election time before quickly reverting to 4.3 per cent the following month.

This is not to say that elections and the prospect of a change of government have no effect on businesses and the investment and hiring decisions they make.

Obviously, if the Federal Government is one of your important customers or a major employer in your area, you could well have a lot riding on the outcome of the poll (though neither side looks likely to unshackle Commonwealth spending any time soon).

But equally obviously, for most employers and investors the election and a possible change of government is only one of a number of considerations, and probably not a major one.

In the ebb and flow of domestic and international commerce, whether it is Kevin or Tony is ultimately neither here nor there – despite what people may claim.

 

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