Daily Commentary BY THE CURVE TEAM –

RBA Provides Clarity But Still Living In Hope

27th of November, 2019

‘RBA Day’ didn’t disappoint with the RBA’s making clear their thinking on the economy and monetary policy outlook.

We said yesterday that the RBA had the perfect platform to make clear their thinking on the economy and outlook for monetary policy. They certainly delivered in giving us greater insight. I highly recommend for anyone who wants to know where we are what where the RBA thinks thinks are going that you read both speeches which you can find here:

One of the key’s from yesterday’s updates was the clarification of the lower bound for the cash rate and what the next steps from the RBA might look like. The RBA confirmed that the lower bound for the cash rate is 0.25% based on the corridor system they central bank operates.

Governor Lowe then confirmed it would only be at the point that the cash rate reached 0.25% and “there were an accumulation of evidence that, over the medium term, we were unlikely to achieve our objectives”, that they would turn to unconventional policy measures.

What those measures might look like was also clarified. The RBA would look to lower the risk free rate by buying government securities in the secondary market.

After outlining all of this in much more detail, Governor Lowe said that “At the moment, though, we are expecting progress towards our goals over the next couple of years and the cash rate is still above the level at which we would consider buying government securities. So QE is not on our agenda at this point in time.” 

We must remember that this is the same RBA who was expecting the next move in the cash rate to be up, not down, late into 2018 before delivering the first of three rate cuts in May, less than a year later.

The gradual nature of the progress the RBA is making on its objectives was laid bare by Deputy Governor Debelle earlier in the day. After detailing why the unemployment rate hasn’t fallen and wages haven’t risen, all he could add is that low wage growth now appears to be the norm and that a significant turnaround isn’t in sight.

He then went on to close by saying:

“A gradual lift in wages growth would be a welcome development for the workforce and the economy. It is also needed for inflation to be sustainably within the 2–3 per cent target range.”

The combination of both speeches hardly instills confidence that the RBA is going to be able to engineer a substantial turnaround in the economy in a hurry. It is also clear that consumers are losing confidence too. The latest weekly ANZ-Roy Morgan consumer sentiment survey fell heavily again.

The number that stands out is consumer expectations around the economy. Medium term expectations for the economy fell to the lowest level since the weekly survey began.

In their minutes to the November meeting, the RBA said that “they also discussed the possibility that a further reduction in interest rates could have a different effect on confidence than in the past, when interest rates were at higher levels.” It appears that taking the cash rate to where it currently sits is already undermining confidence.

It is likely going to take more than more monetary stimulus to turnaround the long run prospects for the Australian economy.

David Flanagan

Director - Interest Rate Markets