Wednesday, 29 May, 2019
Terry McCrann: Four RBA interest rate cuts? Don’t be so sure
Terry McCrann: Four RBA interest rate cuts? Don’t be so sure
We know the RBA will cut interest rates next week, but then what? Take all the economists’ forecasts with a very big pinch of salt, writes Terry McCrann. Here’s what really lies ahead.
Terry McCrann, Herald Sun
Predictions are growing that the RBA will be forced to cut rates even deeper than currently exp…
Whoa! The Reserve Bank hasn’t even cut its official interest rate once, yet commentators are racing to be first to predict the most cuts in the shortest possible time.
JP Morgan’s Sally Auld has moved to the top of the — for want of a better term — ‘leaderboard’ with the prediction the RBA will deliver four cuts by June next year, taking its official rate down to just 0.5 per cent.
And indeed, she can even see the RBA going lower than 0.5 per cent. Or, as she puts it, “we can’t be definitive that 0.5 percentage points is the effective lower bound for the policy rate in Australia”.
WHY THE RBA WILL CUT
MORE TERRY McCRANN
Well yes, as I told you on the Friday before the election, the RBA was finally going to cut its rate for the first time since August 2016. That cut will be delivered next Tuesday.
It will take the rate down from 1.5 to 1.25 per cent.
The big four banks — can’t say the same about the smaller ones — will, broadly, follow with 0.25 per cent cuts to their mortgage rates.
Commentators predicting they might or should cut by more, on the basis of the somewhat bigger fall in their overall funding costs, are overly arithmetic and inadequately analytical.
Yes, that might be true of this 25 points; but it wouldn’t be of the next 25 points (if it came).
I would assume that no bank would be stupid enough to deliver, say, a 30-point cut after next week — only to have to then under-cut with, say, 15 points at the next RBA rate cut.
The absolutely basic thing to understand is that next week’s cut is the only cut the RBA has locked in.
As the late great Robert Holmes a Court used to say: the RBA has “no present intention” of cutting a second time.
Yes, it might broadly think it probably will deliver a second cut. Yes, it can analytically feel that it might end up delivering even more cuts.
But right now, it’s 25 points and then the RBA will step back to analyse and try to anticipate in 24/7 real-time.
The other big thing seemingly not well understood in the economentariat is that we got a fundamental ‘game-changer’ the next day. That’s, the ‘next day after I told you’. The election result.
‘Everybody’ and I mean everybody, including most relevantly in the context of this comment — those at the RBA — believed Labor was going to win.
They anticipated living in a world impacted by Labor’s policies — and very specifically in the immediate future, Labor’s planned big tax hit and even before delivery its impact on investor (and consumer) confidence and behaviour.
No, the RBA wasn’t making any judgment on the good or bad of those policies; simply their likely impact on sectors of the economy and the economy overall — critically, in the context of everything else that was happening and developing. Suddenly, like everyone else, the RBA’s had to do an analytical 180.
Now we are not going to get the hit on negative gearing. We are not going to get the hit on franking refunds. We are not going to get the tax hit on capital gains.
All those have suddenly become ‘negative positives’ to the economy and in particular to the second-hand property market and housing and construction sectors.
Plus, we have a series of ‘positive positives’. These include APRA’s easing of the borrowing rules; the ‘five will get your 20’ mortgage deposit help from Canberra for first-home buyers and, most immediately impactful of all, the ‘tax splash’ in one hit in July when taxpayers file their returns.
Then add the RBA — and bank — rate cut. This all adds up to one huge — even ’uge — boost.
Before all this, the RBA was actually pretty optimistic about the outlook. No, it wasn’t forecasting a boom, but it was predicting economic growth running just below 3 per cent, the jobless rate at 5 per cent, and both inflation and wages picking up pace.
The forecasts had the technical assumption that the RBA would cut its rate twice, but over an extended period that went into 2021. With the first in a week, that provides a lot of time for the second cut.
Now while the RBA did not also ‘technically assume’ a Labor win, that must have played some underlying influence in its analysis.
Now, of course the RBA could be getting it wrong. As I’ve previously detailed, it ‘got’ the second half of 2018 (over-optimistically) wrong. But to no serious negative cost.
The May kick-up in the jobless rate from 5 to 5.2 per cent does raise the question of whether it is getting the economy wrong now in real-time. It was also the trigger for the coming rate cut.
That makes the next jobless number dramatically important. A further kick-up would trigger an immediate follow-up rate cut in July.
But if it went back to 5 per cent, the RBA would sit on its hands and watch the unfolding post-election new reality.
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