Curve Daily Commentary, April 28, 2015

Low Rates are a Growing Concern

Another day has past and the doubt continues to build over whether the RBA will lower rates again next week. This time it was the ANZ who weighed in and said that while they still favour a cut next Tuesday, it was now very much a line ball decision.

Another night of gains for iron ore, along with coal prices, continues to buoy the outlook for the economy and more importantly the budget. Countering that however is that another night of weak data saw a further decline in the USD, pushing the AUD above 0.7850, its highest level in a month.

Tipping the scales towards the no cut camp however was a further sign that the RBA is getting increasingly concerned with risk associated with leaving rates too low for too long. In a speech delivered yesterday by RBA Governor Stevens, who outlined at the outset that he would not be commenting on monetary policy, touched on some of the risks. Stevens highlighted that:

Screen Shot 2015-04-28 at 10.06.48 amThe key question is: how will an adequate flow of income be generated for the retired community in the future, in a world in which long-term nominal returns on low-risk assets are so low? This is a global question. Just about everywhere in the world the price of buying a given annual flow of future income has gone up a lot. Those seeking to make that purchase now – that is, those on the brink of leaving the workforce – are in a much worse position than those who made it a decade ago. They have to accept a lot more risk to generate the expected flow of future income they want. 

This reinforces that, regardless of the outcome next week, we are at or very near the low in this cycle. It is also a very strong indication that the RBA will be no slouch in lifting rates back to a neutral level as soon as the economy can support a neutral cash rate.