Well, I got that one wrong, didn’t I?
The interest rate call, that is. Here I was thinking Glenn Stevens would remain calm in the face of a huge amount of pressure, and opt to change the RBA’s language ahead of a rate cut. But he went ahead and cut anyway.
Does this suggest a bit of panic is setting in for the Reserve Bank of Australia? After all, this was the last paragraph from the December rate decision:
‘In the Board’s judgement, monetary policy is appropriately configured to foster sustainable growth in demand and inflation outcomes consistent with the target. On present indications, the most prudent course is likely to be a period of stability in interest rates.’
I guess you could call two months a period of stability. Or not.
This week’s rate cut suggests the RBA is increasingly worried about the future. Worried enough to accept the risks (in terms of financial stability) that another rate cut brings about. To show you what I mean, consider some commentary from Glenn Stevens’ last appearance before the Senate, back in August 2014.
‘Right now, the savers are feeling the pinch of very low rates of interest on the safe assets that they hold and they are being prompted in many cases to accept a little more risk to get the return they are seeking. That is part of how policy works. That distribution of income is something I think about a lot because, although popular commentary just regards lower interest rates as always better, that is not really true for significant parts of the economy; it is actually bad for significant parts of the economy. In evaluating what we should do, I think, in contemplating what is the pay-off and what is the cost and the risk in a particular move, those considerations need to be borne in mind, not just the interests of borrowers. There are actually more savers than borrowers, in fact.
‘So I think those distributional things matter. Unavoidably, when we change the interest rate we have an effect on that distribution. We do not resile from that; we cannot make it go away either. I think, other than under the most extraordinary circumstances, one might think that there may be some point at which you do not want to keep punishing the savers too much further.’
I wonder how much further he means? Or are we entering extraordinary circumstances?
The following comment came from Philip Lowe during the same Q&A session:
‘At the end of the day, monetary policy cannot be the engine of growth in the economy. We can help smooth out the fluctuations, but we cannot in the end drive the overall growth in the economy. It is really structural issues that do that.’
And this again from Glenn Stevens:
‘…I do not think, to the extent that the economy has some ailments, that it is because interest rates are punishingly high. I think we need this environment where there is more confidence to move ahead. I cannot make that happen. I have allowed the horse to come to the water of cheap funding. I cannot make it drink. I think it is a question for legislatures, governments and political leadership on all sides to think about what conduct, what measures and what ways of doing things help to create that confidence…’
Hmmm, what creates confidence? Are record low interest rates and a rabble in parliament conducive to confidence?
Given this background thinking of the men who tinker with the price of credit in Australia every month, you could come to the conclusion that they are pretty worried about the nations’ economic prospects…despite a much weaker dollar, despite the short term boost that lower petrol prices will bring, and despite the ‘wealth effect’ of higher asset prices.
After all, the comments above came before the iron ore price crash and the more recent oil price crash, which will have a major effect on the billions invested in Australia’s LNG projects. Suddenly, the mining investment boom that was supposed to lead to an export (and income) boom isn’t looking so likely.
Perhaps it should be no surprise then that Glenn Stevens flew to Canberra yesterday, straight after the RBA board meeting, at the behest of government to brief them on the interest rate decision. This is the first time an RBA governor has been asked to do so…perhaps the government is starting to wake up to fact that Australia’s economy ‘is not different’ after all.
What did he say? Sounds like he told them to pull their finger out. From the afr.com:
‘The Abbott government has ¬abandoned the search for big May budget savings, will not meet its ¬forecast 2018 return to surplus and is privately acknowledging collapsing revenue means it is highly unlikely to offer tax cuts at the next ¬federal -election.
‘The dramatic dumping of ¬long-standing goals came as a two-day meeting of the federal cabinet heard a gloomy update from Reserve Bank of Australia governor Glenn Stevens and Treasury secretary John Fraser.
‘There has been a major shift in ¬economic rhetoric from embattled Prime Minister Tony Abbott and ¬Treasurer Joe Hockey in recent days, to a focus on “growth and jobs”.’
In other words, Canberra is freaking out.
With the state of federal politics right now, the best thing that could happen to confidence in this country would be to round up the government and dump them in the middle of the country, and let them find their way back to Canberra.
With the state of Federal politics right now, the best thing that could happen to confidence in this country would be to round up the government and dump them in the middle of the country, and let them find their way back to Canberra.
The boost to morale would be equivalent to two interest rate cuts. But it would quickly disappear when the realisation hit that there was no competent alternative.
Malcolm Turnbull? Maybe…his biggest attribute is that he’s kept his head down and distanced himself from the Abbott debacle. Being a former banker though, he would know that Australia faces a very tough economic future.
When the economy is going south it’s very difficult to stay in power, Turnbull knows this. Politicians have built a false narrative for years that, when things are going well, it’s largely because of them (yeah right, it’s got nothing to do with the hard work and dynamism of everyone else in the economy achieving things despite the government’s efforts). So when the slowdown comes, they are naturally the scapegoats.
If Turnbull can see ahead a few years, he’ll be happy for Bishop or another hopeful to throw their hat into the ring. Because the coming economic downturn will likely see another change of political parties at the next election.
The chances of this government doing anything meaningful to try and promote long term economic and productivity growth are dwindling by the minute. That leaves interest rates as the only lever left. With interest rate ammo running out, that is not a good place for Australia to be in.
But Australia is not on its own. It’s just joining the rest of the world in the hope the lower and lower interest rates can revive growth. It won’t happen; it’s as simple as that. Sure it creates higher asset prices, but it will not lead to sustainable economic growth.
And it’s the economy that creates jobs, not the stock market. Trying to turn this relationship upside down is plain stupid.
China is the latest country to join in. Yesterday it cut the banks’ ‘reserve requirements’ by 50 basis points, which is expected to free up capital for the banks to lend. I wonder if this has anything to do with capital outflows in China being the largest since 1998.
It’s certainly more complex than simple ‘monetary easing’. More on this topic tomorrow…
for The Daily Reckoning