Traders thought they saw Glenn Stevens’ bottom on Tuesday – the point at which the RBA’s rates easing cycle ends and the long, long road back to higher rates begins.
The bank cut the cash rate from 2.25 per cent to two per cent, but it also removed any mention of future cuts from its Monetary Policy Statement.
That’s what makes it look like a bottom.
The result in various asset markets was confusing. The stock market rose, bond prices fell and the Australian dollar went down, then up.
Decoding such strange price action is difficult, but it seems the big question in traders’ minds was not ‘will the RBA cut rates?’ but ‘will the RBA signal a return to more normal settings?’.
It’s the latter that appears to have been answered by the bank’s statement.
Take the currency market movements, for instance. Usually a rate cut feeds through to lower returns on AUD cash deposits, so traders take their money and look for better returns abroad. When that happens, the dollar falls.
So why did it shoot up on Tuesday?
Economist Stephen Koukoulas thinks traders have switched from short-term speculative currency positions to a longer-term view of the AUD.
Yes, cutting rates should see the dollar fall, but traders will have realised from the Monetary Policy Statement that from this point on, the dollar may not be as weak as their previous projections had suggested.
Well that’s the theory, and it’s as good as any.
The RBA statement did its best to talk up the economy, though the best it could manage was that “the available information suggests improved trends in household demand over the past six months and stronger growth in employment”.
Well that’s not going to set the Aussie dollar on fire, and there are two sources of structural weakness in the economy that could drag it down further: “The key drag on private demand is likely to be weakness in business capital expenditure in both the mining and non-mining sectors … Public spending is also scheduled to be subdued.”
So the RBA has looked at an economy where investment and jobs growth are not terrible, but not enough to keep up with population growth. And it’s also guessing that the Abbott government will stick to its promise to hand down a ‘mildly contractionary’ budget next week.
In that context, cutting rates one last time and signalling they won’t go lower is about all the bank could do.
While it’s true that this strategy pours fuel on the over-heated property markets in Sydney and Melbourne, the RBA thinks changes to macro-prudential regulation via the Australian Prudential Regulation Authority will have to handle those problems.
And all the while, both Mr Stevens and the traders who hang on his every word, know that domestic monetary policy could soon become even less effective when the US Federal Reserve finally gets around to raising the Fed funds rate – the target rates is currently 0.0 to 0.25 per cent, where it has been since 2009.
When that hike finally takes place the AUD should fall further, the ASX could be weakened and even government bond prices should fall further, making it more expensive to finance budget deficits (already, the government’s 10-year borrowing costs have risen from 2.4 per cent to 2.8 per cent).
Many nations, including Australia, have lived in a kind of limbo while US rates have been close to zero these past six years. When they rise, the effect on asset markets could be chaotic.
For my money, Mr Stevens is looking ahead to a long, slow return to trend growth in Australia, punctuated by bouts of market volatility caused by global factors.
In those conditions, cutting rates below two per cent would seem to be pointless – it’s just not inspiring investment and job creation – but holding rates at two per cent for a very long time could make sense.
Tuesday’s move suggest that the only way is up, but on a long and bumpy road.
And another thing …
Opposition leader Bill Shorten told a McKell Institute audience last weekend that he refused to be “intellectually dishonest” by ignoring the problem of asylum seekers dying at sea.
There’s not a lot of honesty in that position.
It was Mr Shorten’s own party that in 2012 put forward ‘the Malaysia solution’ – to date the only asylum-seeker policy that attempts to start building a multilateral solution to displaced persons in our region.
The policy had many flaws, but was incorporated into a private member’s bill sponsored by then-independent MP Rob Oakeshott which aimed to use both offshore processing in Nauru, and ‘people swaps’ with Malaysia’s large population of stateless people, to disincentivise boat crossings to Australia.
Having passed the House of Representatives it was voted down in the Senate by the Greens and Coalition.
Mr Shorten’s ‘intellectual honesty’ should do more than acknowledge the fact of deaths at sea.
He should also acknowledge that the offshore detention centre ‘deterred’ embraced again by Kevin Rudd in 2013, is a blight on our human rights record that will only harm future relations with some of our most important trading partners.