The ASX 30 Day Interbank Cash Rate Futures Implied
Yield Curve is forecasting two cash rate decreases of 0.25 percent in 2019.
The call for rate cuts seems to have picked up velocity
after “celebrity” economist Shane Oliver (the one with the terrible dyed blonde
hair) started making noises about the need for rate cuts. As the sage of Omaha
once said, “economic forecasters exist to make astrologers look good”.
Christopher Joye, portfolio manager with Coolabah
Capital Investments, has been one of the very few commentators to have been
highly critical of the Reserve Bank of Australia’s insane policies. A quote
from Coolabah’s web site:
Needless
to say, the RBA is doing its best to once again irresponsibly inflate the
hazards to which prudent investors are subject. It is quite staggering that
with a 5.5 per cent jobless rate, which is a sliver above full-employment, and
headline inflation within the RBA’s target band, that the central bank
nonetheless deems it appropriate to impose a negative real cash rate on savers.
Oh no, the rate cuts in 2016 had nothing to do with the “surprising” and striking re-acceleration in national house price growth back to double-digit rates in the months that followed. No, that was all about housing supply. Seriously Phil, bite the bullet brother.
I couldn’t agree more.
The RBA is now so addicted to the drug of inflated house
prices that it is seriously contemplating rate cuts to an already artificially
low rate when there is no recession and employment is as good as it has been in
this country for at least 50 years! And this is all because people might feel a
little poorer because their houses in Sydney and Melbourne have decreased in
value by perhaps 10 percent or so, after a run up of 60-70 percent in recent
years! It’s patently absurd.
Then the RBA Governor, Philip Lowe (a real life version
of Nassim Taleb’s “Dr. John” character), had the audacity to call on employers
to lift wages. They need to lift wages because many people in Sydney and
Melbourne cannot afford to buy a house and are being hit with sky high energy
prices – both of which are a direct result of government policy!
The problem is, employers are not responsible for the breathtaking
incompetence of government and they are already struggling under the burden of
Australia’s already high average weekly ordinary time earnings (AWOTE), so
dream on Phil – it’s not going to happen. (And if the jingoistic Bill Shorten
wants to lift the minimum wage, go ahead, business will simply employ less
people.)
At this point, the attempt to micro-manage the economy
through the blunt instrument of interest rates is neither necessary nor ultimately
effective. And let’s please remember that the majority of Australians own their
own home or rent, those with a mortgage are in a minority (but are always
pandered to by self-serving politicians and their factotum public servants).
The RBA
has already lost significant control over interest rates. Approximately half of
Australian bank funding is sourced from offshore (largely the US) and is thereby
beholden to the rates that fund providers in those offshore debt markets
require. A relative of mine who is a banker, told me on the weekend that if the
RBA does cut rates, the banks are
unlikely to pass on any more than 10-15 basis points (if they can even manage
that).
The cheapest funding source for Australian banks is
domestic household deposits. These deposits finance approximately one third of
the banks’ total funding needs. Most of this money comes from self-funded
retirees and high net worth individuals (not always mutually exclusive groups).
As pointed out by Coolabah Capital Investments, after tax, the return on these
deposits is negative, i.e. below inflation.
Now, if the RBA cuts rates and banks choose to reduce
rates on household deposits (i.e. term deposits) at the same time that a
federal Labor government is in power (and has taken away the refunds on excess
franking credits*), bank depositors will be forced to move part of this money
out of the banks and into alternative (higher yielding) investments. Banks will
then replace deposit funding with more costly funding sources such as hybrids and
offshore funding, which in turn could result in independent bank rate rises.
The exact opposite of what the nutcases at the RBA are trying to achieve.
This of course will all take time to play out, but it
will happen if the RBA and the Labor party are stupid enough to do what we are
supposing they will do.
Another casualty will be the Australian dollar. If the
RBA actually makes two 25 basis point cuts, there is no way the Australian
dollar will stay in the 70s against the US dollar. In recent times, backing the
US dollar against the Australian dollar has been like shooting fish in a
barrel.
Australia is a large net importer of manufactured goods
and petroleum and this will result in price inflation on these goods, once
again hitting the average person in the hip pocket.
With friends like the RBA and the Australian Labor
Party, who needs enemies?
* Does anyone actually think that a Labor government
will responsibly utilise the billions they think they are going to save from
the abolition of refunding excess franking credits? And to all those younger people with self-funded
retiree parents or grandparents who are thinking that all of this won’t affect
them – like a thief in the night, the Labor Party is about to steal a good part
of your inheritance.