Lot’s of hand-wringing today over Capt’ Glenn’s interview at the AFR today:
Declining commodity prices, an income recession, a gridlocked Senate, plunging consumer confidence and, everywhere except Sydney, a flattening housing market. At first glance it would appear the economic ducks are in a row for an interest rate cut. But are they really, and would it even help much?
When Westpac released its monthly consumer confidence survey it showed a 5.7 per cent drop since November, putting the index at its lowest level since 2011. It has not been that consistently low since 2009.
Last week, Westpac joined the NAB in forecasting that Reserve Bank interest rates will be dropped; in fact, Westpac is predicting unlikely February and March drops of 0.25 per cent.
The question now is, with interest rates already at record lows and petrol prices falling, will interest rate cuts make a difference, or will they hurt the economy?
“It is very hard to see where there is going to be a drastic change in consumer spending habits,” said Commsec economist Savanth Sebastian when asked about the prospect of rate cuts.
“Another rates cut could be detrimental as average households might think the economy is in dire straits.”
Earth to Savanth, the economy is in dire straights as 30 years of macro missteps have distorted our economic structure to the point that the stimulants of the cycle no longer work.
Bill Evans is confused, too, and points out in a note today:
On December 4 last week we changed our interest rate forecast to expect a rate cut of 25 bp’s in February to be followed by a second cut of 25 bp’s in March. By yesterday the market had moved to price in a probability of 40% of a rate cut next February and 70% of one cut by March. Another way to look at this is to note that the market expects 18 bp’s of cuts by March compared to our own view of 50 b p’s of cuts.
These ideas have been dashed by an interview with the governor which appeared in the Australian Financial Review today (December 12). In the interview the governor opines that he would like to see the AUD at USD 0.75 but argued that maintaining stability in rates was the best way to support confidence.
Markets have immediately moved to lower the probabilities of a rate cut in February to an insignificant 16% and a cut by March to 50%.
Later in the interview the governor does note that any decision to lower rates would need to be part of a positive narrative, “a positive narrative might be that inflation is not any impediment to even lower rates if they would be helpful”; other reasons could be softer wages growth or “a calmer housing market”.
Sure, that may be what he’d like. But that is not what he’s got. Stevens’ has an economy of two halves that runs on mining income leveraged up into housing debt. The first one is dying, the second is debt-saturated. So long as he stays in this paradigm, the economy won’t grow and he will have no choice but to cut rates further even though he knows the dangers of doing so. That is why macroprudential is so important.
That’s the real issue. Stevens talked constantly about repairing “confidence” (cyclical) when what he should be talking about is repairing “competitiveness” (structural). To repair that we will need to increase productivity via tax reform, quality infrastructure investment, IR reform, Federation reform, so on and so forth. And install policies to lower the dollar below 60 cents. Stevens’s bureaucratic waffling around the fiscal agenda is self-defeating for the RBA because it traps it as the only lever to pull.
Captain Glenn is like Kafka’s half-changed cockroach in The Metamorphosis, horrified at the economist he was and appalled at the economist he must become. Rate prognosticators would be best served ignoring him and watching the economy. Rates will fall, he’ll have no choice.
