A whiff of a pre-emptive strike, or something other than the country’s central bank ‘fine tuning‘ the economy in yesterday’s surprise rate cut decision from the Reserve Bank? The decision knocked the dollar sharply lower – it fell from just $US1.0240 to just under $US1.0188 in the space of 10 minutes, especially as traders saw the bank leaving open another rate cut.
The dollar ended around $US1.0180 this morning in offshore trading. It had fallen to a low of $US1.0155, but recovered as investors around the world revealed more confidence. That lifted share prices in Asia, Europe and the US.
The Nikkei in Japan ended at a five year high and Germany’s Dax flirted with an all time high. Wall Street ended the day with moderate gains (the Dow ended above 15,000), but gold and oil both dipped, copper was steady after Friday’s 6% bounce and bond yields eased higher.
Some investors are now readying for the monthly release of economic data from China later this week and at the weekend which will impact the value of the dollar and the Australian stockmarket, especially if the figures show the economy continues to run slowly.
Yesterday’s rate cut decision here seems to have been aimed at achieving several things – knocking the dollar’s value lower, providing some extra stimulus for the economy ahead of what’s expected to be a tough budget that will detract from economic growth in the next year, providing the faltering growth in housing and non resource investment with another turbo-boost and pressuring the banks to cut home lending rates by the full 0.25%, which most had done so by last night.
It will mean lower rates on term deposits as they roll over and lower rates for transaction accounts. Whether the cut to home mortgage rates now flowing through will have an impact on domestic demand is problematic because more than half the number of mortgage holders have been using the rate cut savings to repay their loans faster than they have to.
And with investors still hunting for yield in the share market, the rate cut (and the dip in bank deposit rates towards 3%) will add to the pressure on shares with high dividend yields, such as the banks, Telstra and companies such as Coca Cola Amatil, which is now more attractive after yesterday’s 10% sell off and higher dividend.
Australian Interest Rates – Down To 53-Year-Low Of 2.75%
And the bank appears to have decided to use up some of the policy leeway from the lower than expected inflation rate to cut rates now, rather than later, or not at all. The bank wants to add to the firepower in the economy later in the year when the resource investment boom shows softens further.
"The Board has previously noted that the inflation outlook would afford scope to ease further, should that be necessary to support demand. At today’s meeting the Board decided to use some of that scope. It judged that a further decline in the cash rate was appropriate to encourage sustainable growth in the economy, consistent with achieving the inflation target," Mr Stevens said in yesterday’s statement (http://www.rba.gov.au/media-releases/2013/mr-13-10.html).
That’s the key phrase in yesterday’s statement: Compare that with the final paragraph of the April statement:
"The Board’s view is that with inflation likely to be consistent with the target, and with growth likely to be a little below trend over the coming year, an accommodative stance of monetary policy is appropriate. The inflation outlook, as assessed at present, would afford scope to ease policy further, should that be necessary to support demand. At today’s meeting, the Board judged that it was prudent to leave the cash rate unchanged. The Board will continue to assess the outlook and adjust policy as needed to foster sustainable growth in demand and inflation outcomes consistent with the target over time."
And the dollar was again targeted by Mr Stevens: "The exchange rate, on the other hand, has been little changed at a historically high level over the past 18 months, which is unusual given the decline in export prices and interest rates during that time. Moreover, the demand for credit remains, at this point, relatively subdued."
The cut, although priced into the market with traders reckoning a 52% chance of a cut, was not seen by business economist (or me). Reuters’ pre-decision survey had just 4 of 21 respondents predicting a cut, while a separate one from the Wall Street Journal had only 2 of 18 economists expecting a cut.
Leading business economists in Bill Evans of Westpac and Shane Oliver of the AMP both reckoned the RBA had another rate cut in it, but were not confident either of a rate cut in May. June was more preferred.
So even the ‘experts’ were blind-sided by the decision, which also came ahead of the Federal Budget and what is expected to be a further contraction in spending and the contribution to growth in the coming year.
And the pressure on the big banks and the two major regionals to pass on these rate cuts in full worked, even if the banks didn’t rate a mention in yesterday’s statement.
After the very strong results in the past week from the ANZ, bank of Queensland and Westpac, the banks’ case against not passing the rate cut on in full, had weakened.
The NAB, which reports its March 31 interim profit tomorrow jumped ahead of its competitors with a full pass on of the rate cut to housing It cut its standard home loan by the 0.25% to 6.13%. The Bank of Queensland soon followed with a full cut of 0.25%. And the biggest home lender, the Commonwealth produced its rate cut as well. Westpac moved early yesterday evening.
The ANZ decision will cut on Friday after its monthly meeting on rate levels.
Of course, the rate cut should be more than just to home mortgage borrowers.
Small and medium business also need lower rates (many are paying more for their loans inspire of the 1.75% in RBA cuts up to yesterday). And the banks have been slow to pass on the rate cuts on credit cards as well.
In his statement, Mr Stevens did acknowledge that the rate cuts since late 2011 were having an impact:
"Over recent meetings, the Board has noted that interest rates have already been reduced substantially, with borrowing rates approaching previous lows, and that the effects of this on the economy are continuing to emerge. Savers have been changing their portfolios towards assets with higher expected returns, asset values have risen and some interest-sensitive areas of spending have increased."
But that impact hasn’t been enough for the RBA satisfaction. And it has had to face up to the fact that the already substantial series of cuts haven’t had the desired impact on the economy, especially on housing demand and construction and the value of the dollar and another cut (or cuts) was needed.
The dollar’s stubbornly high value is the major impediment, (and to the Federal budget) but so too are the cuts to spending in state and Federal budgets.
