• The RBA left the cash rate on hold again in October at 1.50% after cutting in May and August.
  • RBA Governor Stevens elected to leave the outlook open in his final accompanying statement.
  • There have been a number of key monetary policy developments globally over the past month.
  • Evidence is building to suggest the global monetary policy cycle could be turning.

Rates Recap

  • The RBA left the cash rate on hold in October after lowering it at both the May and August meetings.
  • New RBA Governor Phillip Lowe displayed a steady hand at the wheel with his accompanying statement to the decision to leave the cash rate unchanged.
  • The statement gave little away on the outlook with the November meeting and subsequent Statement on Monetary Policy the next chance for an updated forecast.
  • A number of developments offshore around monetary policy has seen market volatility increase over the past month.
  • Bond markets have been increasingly nervous with yields threatening to shoot higher.
  • Evidence globally suggests the monetary policy cycle could be turning.

Policy Reversal

Another month has passed as has another FOMC meeting and we are still waiting on the data to be unequivocally strong enough to force the Committee’s hand to lift rates. The music will continue to play and we will do the same dance again in December. While the FOMC has sat pat, we have seen a number of developments in other jurisdictions, adding further evidence to suggest that the great monetary policy experiment of recent times is coming to an end.

The Bank of Japan last month threw out the monetary policy handbook in what was largely seen as a ‘whatever it takes’ moment. A closer look suggests there is a little more to it than that. The removal of a target for expanding the monetary base through asset purchases and the commitment to buying until inflation exceeds its 2% target was no doubt seen as an increase in its efforts to boost growth and inflation.

It’s ha a new focus of putting some shape back into the yield curve with a fulcrum at the 10 year part of the curve. The attempt to lift the back end of the curve while anchoring the short end is a sign the BoJ is coming to the realisation that lower and lower rates, including going negative is not having the desired effect.

The Bank of England was also put on notice by the new British Prime Minister, Theresa May, when she gave her first speech at the Conservative Party’s Annual Conference. In her speech which went for over an hour and touched on almost every policy area, May said that “change has to come” when discussing the BoE’s policy outlook. In leading to an assertive conclusion, she stated:

“While monetary policy — with super-low interest rates and quantitative easing — provided the necessary emergency medicine after the financial crash, we have to acknowledge there have been some bad side effects. People with assets have got richer. People without them have suffered. People with mortgages have found their debts cheaper. People with savings have found themselves poorer.”

Similar sentiments were shared by Wolfgang Schaeuble, Germany’s Finance Minister, who said “Monetary policy reaches its limits with negative side effects…becoming more and more visible.” His sentiments come after rumours were reported by Bloomberg last month that ECB policy makers have been discussing a potential tapering of their bond buying as the scheduled end of their current program, March next year, draws near.

Our own Treasurer Scott Morrison even aired his opinion on the matter at the IMF and World Bank meetings over the weekend. Morrison said monetary policy has “exhausted its effectiveness” and that “its ability to impact and influence is diminishing.” He also echoed Theresa May’s earlier sentiments that “while monetary policy — with super-low interest rates and quantitative easing — provided the necessary emergency medicine after the financial crash, we have to acknowledge there have been some bad side effects.”

Is it any wonder with all these developments that bond markets are getting jittery! We are approaching a turning point for global monetary policy and it isn’t just centred at the FOMC. The question is, if ultra accommodative monetary policies haven’t worked and governments are pushing for change, are they willing to and do they even have the room to fill the gap? Given most governments don’t have the room, fiscal policy makers may have to pick up where their monetary policy colleagues have left off and get creative with fiscal policy initiatives.

Outlook for Interest Rates

Unlike the series of developments for monetary policy offshore over the past month, Australia’s monetary policy outlook remained largely in its holding pattern. The only real change to note over the past month was the change of pilot at the helm of the RBA. Glenn Stevens has now exited the building with his former Deputy, stepping up to the controls.

In his first meeting at the helm, Governor Lowe proved a steady hand at the controls, deciding not to take the opportunity to put his mark on the accompanying statement. Instead we got more of the same with a few subtle tweaks, something which we have become accustomed to in in recent years, from meetings which haven’t followed a CPI release.

In the context of the offshore developments, it certainly suggests any further cuts to the cash rate in Australia will require a significant deterioration in the current outlook for the Australian economy. The evidence from what other central banks are experiencing is starting to show that once rates go below a ‘tipping point’ they actually become contractionary. Rather than encouraging an increase in consumption, when rates get ‘too low’ they actually encourage an even greater increase in saving to offset the falling return on current savings. At the same time, increased borrowing capacity only helps to further inflate asset prices to potential unsustainable levels.

Market pricing for the cash rate actually now suggests a very outside chance the cash rate will be lowered further. Currently the market only has a slightly greater than 50% chance of a cut priced in and it is not until the middle of next year.

Like in many other jurisdictions, it seems, barring a significant change in the economic outlook or one of the many risk failing to materialise, our monetary policy cycle may have run its course.

Australian Economic Highlights

  • Growth just missed expectations in Q2 with GDP rising by 0.5%, down from 1.0% in Q1. Despite the slowing on a quarterly basis, the annual rate still improved from a revised 3.0% to 3.3%.
  • CPI rose in line with expectations in Q2. Headline inflation was up 0.4% after the 0.2% fall in Q1. The core rate was also in line with expectations, rising by 0.45% with the annual rate of underlying inflation easing slightly to 1.5%.
  • The employment data in August was weaker than expected  with total employment falling by 3,900 for the month. The recent trend of part-time dominated growth was reversed while the unemployment rate managed to fall to 5.6% thanks to a 0.2% fall in the participation rate.
  • ANZ job ads remained volatile once again in September with a decline of 0.3% taking some of the shine off the previous months revised 1.7% gain.
  • NAB business conditions index was up a touch in August with with the index climbing 1 point to 8 while Business confidence was unchanged at 6. The only downside was the Employment index which fell sharply from 4 to 1.
  • Consumer confidence consolidated just above the key 100 level in September. The index posted an increase of 0.3%, taking it to 101.4 with optimists still managing to marginally outweigh pessimists.
  • Retail sales sprung back to life in August with total sales growing by 0.4%. It was the largest increase since January this year and comes on the back of almost no growth in the past three months.
  • Housing finance was softer in July. The number of owner-occupier loans were down 4.2% with the value of occupier loans falling 3.1% while investor lending edged up 0.5%.
  • Australia’s trade deficit improved for the second straight month in August. The deficit printed at $2.010 billion which was better than the previous reading of $121 billion and better than the $2.3 billion deficit that was expected.
  • Building approvals went backwards in August, falling 1.8% but still managed to beat expectations of a 6.0% increase. Despite the fall, the annual growth rate still improved from 4.2% to 10.1%.
  • After a volatile few months, motor vehicle sales were largely unchanged in August, growing by 0.1%. The annual rate showed a little more improvement with sales now 2.9% higher than a year ago.
David Flanagan

David Flanagan

Director: Interest Rate Markets