If you listen to the experts, the Reserve Bank is under mounting pressure to lift interest rates.
Among the handful who a fortnight ago were predicting a cut this year, almost all have changed their tune and, suddenly, the chances of an official hike before April next year have risen from zero to almost 40 per cent.
In the lead-up to this month’s meeting, almost every senior market economist expected a change of sentiment from our central bank that would reflect the new mood on the global stage.
The thinking was that because Janet Yellen and Mario Draghi had begun talking up the prospect of higher rates, we would be swept along with the tide. That was reinforced last week when Canada shifted up a notch, lifting its cash rate to 0.75 per cent.
While those efforts to start on the long road to bringing rates back to something approaching normal should be commended, there’s just one problem with the argument.
Australia is in a radically different position to the rest of the developed world. In fact, we’ve been on a different course for a decade.
We boomed while the rest of the world struggled through a horrendous recession.
Now, the opposite is true. We’re running out of steam while everyone else is clawing their way out of the fog.
Even then, despite all the talk, it’s unlikely Europe and the US will push rates too high. They’ve become more concerned with “financial stability” than inflation.
What that means is that they are more rattled by the prospect of popping the bubbles their ultra low rates have formed in stock, bond and real estate markets.
Here are four reasons why the Reserve Bank of Australia won’t be lifting the official rate any time soon:
Australian banks have already raised rates
This may come as a surprise but, for households, those two rate cuts the Reserve Bank delivered last year mostly have evaporated.
In an effort to slow the runaway Melbourne and Sydney property markets, the Reserve Bank and the banking regulator imposed tougher lending rules on retail banks to stymie reckless lending.
The banks responded by raising rates, particularly on interest only loans, which mostly are used by investors. They now are paying much more than a year ago.
In addition, the new bank levy imposed by the Federal Government on the big four in the recent budget is also likely to be passed on and, in fact, smaller and regional banks have already shifted rates higher in anticipation.
That pressure will only increase once global rates rise. Our banks borrow heavily on offshore funding markets. If they have to pay more, they will pass those costs on.
While deciding whether to shift official rates, the Reserve Bank looks, not so much at its own cash rate, but at how much consumers and businesses are paying for loans.
Given rates already are on the up, and wages growth is the weakest on record, it would be a brave RBA governor who would contemplate a rise in the near future. Phil Lowe will let the banks do the work for him.
The RBA wants a weaker dollar
The pundits were stunned when Dr Lowe failed to match his global counterparts this month with hints at higher rates.
Had he done so, the Australian dollar would have gained ground against most major currencies and particularly the US dollar.
That’s the last thing the Reserve wants. In fact, in recent weeks, the Aussie battler has ground its way higher, punching through US77c as the greenback weakened over the latest travails from US President Donald Trump.
With inflation already at bewilderingly low levels, our central bank is keen to let the currency slide back towards US70c and even lower, to help lift our global competitiveness, boost national income and inject some inflationary pressure.
A rate rise, or even hints of a rate rise, would see cash flow into the country to take advantage of our already comparatively high rates which would push the dollar even higher.
China’s shaky outlook
It’s worth noting that Canada’s rate rise last week took its official cash to 0.75 per cent. That’s still only half of Australia’s. It’s also worth noting that Canada’s household debt, while astronomical, is nowhere near ours.
Bank of Canada governor Stephen S. Poloz and senior deputy governor Carolyn Wilkins explain the rate rise
Canadians recently began worrying about how much they owe with households now owing about 167 per cent of their disposable income. Ours is at 193 per cent.
Just like here, Canada is a resource-exporting nation. But the outlook for resources, particularly energy, is weak.
While we are expected to overtake Qatar as the world’s biggest gas exporter within the next two years, iron ore still dominates our export income. And the outlook for both commodities depends upon the health of the Chinese economy.
It’s difficult to find anyone who holds an optimistic view of China in the medium term. Its growth is slowing, even when measured by the generally unreliable official figures, and its debt levels are extraordinary.
During the past two years, each time it has tried to rein in lending, the economy has nosedived and it has been forced to revert to stimulus, just to keep things on track.
That doesn’t bode well for commodity prices next year. And Australia’s economic fortunes are tied to commodities and China.
What Elephant? Ah, property
Having set the hares racing in Australian real estate five years ago, the RBA now has to perform some delicate dance steps if it wants to avoid a disaster.
The idea back in 2012 was to pump up the east coast housing and construction markets to absorb all those workers coming out of the west coast resources boom.
It worked … sort of. Property prices went haywire. Housing starts and construction soared. The only problem was that most first-home buyers were permanently locked out of the market. And those that did manage to get in are now lumbered with record levels of debt.
This has all taken place during the weakest period of wages growth on record.
The upshot is that the Reserve Bank has lost control of monetary policy. Even if inflation somehow managed to take off — and few expect that likely — the RBA would need to wait a decent period before higher prices flowed through to wages before it acted.
Otherwise it would run the risk of widespread defaults, an episode that would put our banks under extreme pressure and cause a recession.
So, rather than acting ahead of the curve, as it has always done, it now will be forced to wait and somehow play a rear-guard role, to mop up the mess.
A rate rise? Don’t hold your breath.