Morning all. Sorry I didn’t get back to you last night. Yesterday saw the RBA lower rates, more on that below, and the Aussie rallied. The thing is, that given that the market was 100% convinced of a cut that who was left to sell the dollar when it did happen? Also, the wording of the statement hinted at no more after this, whilst the market was expecting another cut later this year. So, with that hint and no more sellers, the Aussie ran higher. Overnight the stock markets saw some profit taking off their highs despite some great figures overnight. This saw some sideways action in the US$ as other currencies moved against it. Adam Carr here says it all better than I could, a good read. So then to the Reserve Bank’s rate cut yesterday, it attracted much attention as usual, but there is a growing sense that the board has gone too far. And it has, especially as it looks like the political motivations of the board are too obvious. The statement overall was unchanged, which means that global growth is expected to pick up, Australian growth is expected to be just below trend and inflation contained. Inflation currently is at the mid-point of the target. This is all unchanged from last month, and of course makes no case to have the lowest rates on records. Indeed two hours prior to the rate decision we learned that house prices surged in the quarter and of course the economy more broadly has deteriorated quite sharply since the RBA cut rates – nearly two years on – with a huge chunk of that deterioration in consumer spending. Will they cut again? The consensus has changed rapidly that rates may be on hold from here. I’m not as convinced – the statement was bland and vague, so I don’t think there was much information in the statement or guidance on rates. The sentiment was downgraded modestly given that they took out the sentence suggesting the inflation outlook may provide some scope for further easing, but the board still stands ready to “adjust policy as needed”. That’s a very minor change and not one worth changing your view on. For me the policy makers really have no idea what they are doing, and the heavy political overlay on the Reserve Bank board is just dangerous. Cutting rates in the build-up to an election is a political statement. The problem is that the Labor government has been in disarray for years – it took them years to begrudgingly acknowledge they screwed up removing Kevin Rudd. If they can’t get their political strategy right, how can we expect this party to then come up with a coherent, workable economic plan to govern in the interests of the nation? I’ve got no doubt the government smiled as it stacked the RBA board with ex-manufacturing lobbyists and ALP staffers, thinking it would be an easy ride to slash rates and impose an exchange rate target. They were right about that, but what they didn’t factor in was how disruptive this strategy (to get the lowest rates on record and a lower dollar) would be for the rest of the nation. Confidence is shot and consumer spending – the key driver of economic growth – has declined sharply from last year. Non-mining investment is still at recessionary levels almost two years after the Reserve started slashing rates. All in all, this is just one more failed government strategy. Hopefully we’ll see some much needed discipline imposed on this reckless board with a change in government. At the very least, the Reserve’s easing cycle has brought no discernible benefit to the economy – the evidence in fact shows it has done harm. At worst, we’re already seeing the distorting influence record low rates bring. Indeed there is much press today of another house price boom – and why not, that’s exactly what we are seeing in Canada, New Zealand, England and, yes, even the US again. Meanwhile, business groups warn that the latest interest rate cut won’t have much of an impact. So it’s an exercise in stupidity, then. The sooner we are done with it the better. Read more: businessspectator.au/article/2013/8/7/markets/scoreboard-recurring-nightmare#ixzz2bEeWy3Pg
Posted on: Tue, 06 Aug 2013 23:50:55 +0000