Macquarie Bank interest rate strategist, Rory Robertson explains why the current tack of monetary policy is working.
So, it turns out that heavily geared homebuyers, retailers, populist newspapers, and some politicians don’t like interest-rate rises to control inflation.
Who knew? Actually, this is exactly why it was agreed long ago – across the Western world – to take the job of inflation control from the hands of politicians and put it into the hands of independent central banks.
The good news is that increasing criticism of the RBA – little of it heavy-hitting – reinforces the assessment that tighter monetary policy is biting.
The Australian economy indeed is slowing. The "inflation genie" slowly but surely is being put back into the (2-3%) bottle.
That the economy is slowing is obvious from the increasingly clear deceleration of business conditions, consumer confidence, retail sales, credit growth, home-auction clearance rates and job ads.
Some economists yesterday saw extra information in the fact that consumer confidence didn’t bounce in April after the RBA left rates on-hold. Households, by contrast, didn’t fail to notice that major lenders continued to increase mortgage rates in late-March and early-April, regardless.
Part of downshift in confidence reflects the likelihood that home prices have fallen over recent months – in every capital city – as a result of the nearly 1% increase in mortgage rates since Christmas. After all, a 1% rate rise to 9% or more is a 10%-plus rise in interest-only funding costs. (Some non banking mortgage rates for Low Doc or non standard variable loans are as high as 10.75%)
The extent of the economic slowdown underway – and the extent to which it puts downward pressure on inflation – remains to be seen. But what is clear – and has been now for a month – is that the RBA is on-hold for the foreseeable future. The latest round of mortgage-rate top-ups alongside the increasingly slowing of household demand add weight to the view that the RBA’s next cash-rate move will be down, particularly if the global credit crunch continues to intensify.
Market confidence that the next move in rates is down will grow as the labour market softens. The job of higher interest rates – to contain inflation pressures – typically is complete when unemployment starts trending higher. The RBA’s published plan to return inflation to 2-3% includes a "modest" rise in unemployment.
Thursday’s jobs report did not tell us much that is new, with the unemployment rate edging up to 4.1% from its generational low of 4.0%. Jobs growth probably is in the process of slowing, but the usual lags mean we shouldn’t be holding our breath waiting for it to show up in the data.
If the RBA has indeed hiked "too far, too fast", as some of its critics seem to be arguing, we will see – over the next year or so – unemployment rise sharply from 4% to 5% and beyond, while inflation will drop quickly back from 4% in Q1 towards 2% and lower. At this point, however – with 4% inflation alongside 4% unemployment – the main thing that is clear is that monetary policy should be tight.
If unemployment starts to punch sharply higher and/or forecast inflation pressures start subsiding abruptly – things that would tend to happen if tightening has been excessive – policymakers will respond to the increasingly bleak news on activity by cutting interest rates. But to this point there is nothing firm in the data on that scenario.
The obvious template for early rate cuts is 2000-01: the RBA’s final tightening in that cycle in August was followed by 125bp worth of rate cuts in February, March and April, after the RBA discovered the Australian economy shrank over the second half of 2000.
Mortgage rates approaching 9.5% because RBA wants them there, no other reason.
Headline mortgage rates in Australia are approaching 9-1/2%, up sharply from near 8% last July.
Various media reports in recent weeks have suggested that this is all a bit of an accident, something that happened simply as a result of increased funding costs flowing from the developing global credit crunch.
The Sydney Morning Herald today, for example, reports that "INTEREST rates could potentially be cut for most home loan borrowers by about 1.5 percentage points within a year under a sweeping new approach to financing…" by the way, it’s strange that this proposal didn’t cite a similar proposal reported heavily over recent weeks: .
The trouble with this argument is that, as observed here on Monday, low mortgage rates in the long run depend primarily on sustained low inflation.
Not on a low spread between mortgage rates and the RBA’s cash rate, not on institutional arrangements in local mortgage markets.
That is, average mortgage rates in Australia essentially are set by the RBA in line with the requirements of monetary policy. This year’s big rise in mortgage rates towards 9-1/2% has not been an accident.
It is the result of deliberate monetary policy moves by the RBA. That the RBA wanted higher mortgage rates to contain inflation pressures is the dominant reason why mortgage rates have surged towards 9-1/2%.
Recall that the RBA has increased its policy rate 12 times over the past six years (from 4.25% to 7.25%), including
