Tuesday, November 2, 2010

0 for 3 and the fallout

Well ... this blog has lost its interest rate touch, that's for sure.

It has now blown it two months in a row and underestimated the banks to boot. As a contrarian it should have known better than to bet with the pack.

The statement on monetary policy is kind of interesting. It meanders through a bunch of reasons for a dovish posture on rates including: fragile confidence in markets, caution in private spending, prominent public spending, a high dollar containing inflation at the margin, as well as "asset values are not moving notably in either direction, and overall credit growth remains quite subdued".

Then we do an about face and go for gold:
The demand for labour has continued to firm. While the labour market is not as tight as in 2007 and 2008, some further strengthening would appear to be in prospect, judging by the trends in job vacancies. After the significant decline last year, growth in wages has picked up somewhat, as had been expected. Some further increase is likely over the coming year.

Given these conditions, the moderation in inflation that has been under way for the past two years is probably now close to ending. Recent information suggests underlying inflation running at about 2½ per cent, with the CPI inflation rate a little higher due mainly to increases in tobacco taxes. Both results were helped somewhat in the latest quarter by unusual softness in food prices. Inflation is likely to rise over the next few years. This outlook, which is largely unchanged from the Bank's earlier forecasts, assumes some tightening in monetary policy.

For some time, the Board has held the stance of monetary policy steady, which has resulted in interest rates to borrowers being close to their average of the past decade. This allowed some time to observe the early effects of previous policy changes and to monitor the uncertain global outlook. The Board is also cognisant of differences in the degree of economic strength by industry and by region.

However, the economy is now subject to a large expansionary shock from the high terms of trade and has relatively modest amounts of spare capacity. Looking ahead, notwithstanding recent good results on inflation, the risk of inflation rising again over the medium term remains. At today's meeting, the Board concluded that the balance of risks had shifted to the point where an early, modest tightening of monetary policy was prudent.

The RBA has already said that it considered yesterday's level of rates as the neutral setting so we have entered tight conditions. As for a moderate hike, with the banks piling in (assuming CBA is not the last), it has already happened.

To put it mildly, we have a clear demonstration of a new normal at work here. If credit had been this muted several years ago, it is very unlikely that rates would have risen. But Stevens is not Macfarlane and he seems determined to prevent inflation getting a foothold.

As a corollary, Stevens also seems to be taking seriously the risk that Australians will go on a new borrowing binge with their surging income, blowing out the current account, and increasing further Australia's international debt addiction. The above chart says it all. Stevens is raising rates into a shrinking trend in real household disposable income.

This blog can only applaud the effort.

However, there are going ton be casualties. Retailers beware. Krispy Kreme won't be the last to be squashed under Stevens' heavy boot.

As for the housing market, we're definitely headed into 2003/4 at best.

And then there's the dollar, which will only stay stronger for longer.

On the banks, jeez, it's damn the lifeboats. They seem to have calculated that they're already so unpopular that it just doesn't matter what they do any more. Surely this is the final proof, if any were needed, of failing competition.

They have just flipped the biggest bird at the Australian parliament since BHP, Rio and Xstrata negotiated their own tax rates in the Cabinet Office.

But in one sense, at least, it's really quite clever. By raising rates again they have ensured the coming war from Canberra will be focussed entirely on the consumer. They know there is no way interest rates will be regulated so their worst case outcome in these terms is some new competition from subsidised securitisers or Aussie Post. That can only boost the great ponzi to which they are hostage.

The real threat to bank earnings, addressing their offshore borrowing habit or seriously discussing fair dinkum capital reserve levels, will be completely forgotten.


Anonymous said...

Might be worth comparing the amount they raise their home loan rates with the amount they raise their term deposit rates, over time. This should tell us something about how hard pressed they are for money.

Anonymous said...

I'm happy about the rate rise. Hopefully it doesn't tighten the screws too much on family budgets.

But the Banks' reaction seems dubious - well, the claim of high overseas borrowing costs seems dubious.

Undoubtedly they are working the classic "borrow short & lend long" dictum, but rates for borrowing short?? - The US is effectively giving money away free at the moment, and for the near future. Aus is among the strongest of the western economies, which should translate to lower risk, therefore lower interest.

On top of that, Aus has this marvellous pool of savings looking for solid investments, called Super.

So who is soaping who?

The Lorax said...

RE Term deposits: I can now get 7% at call so I'm looking forward to getting 7.25% sometime later this month. To get that in a TD now I'd be looking at a 5 year term. Weird.

Ok, so there are gotchas with all these online accounts, but if you're careful you can get better returns and still have access to your funds without penalty.

Luke Garratt said...

Lorax: That 7% account sounds good until you read the fine print.

Max $500 opening deposit, and maximum $500 deposit per MONTH. You'd be better off with a 6month TD around 6.2%, or if you don't have an ING account, their intro variable rate is 6.25% for the first 4 months

Back on topic, another good post David.