It’s not often the governor of a Reserve Bank tells economists they need to chill out. But that’s what the RBA’s Glenn Stevens did last night. Channelling his inner street lingo, he instructed markets to ‘chill’ on expectations of a rate cut next week.
On December 1, the RBA meets for the final time in 2015. Having cut rates by 0.50% this year to 2%, some economists believe another 0.25% cut is on the way. Some…but not many. Contrary to what Mr Stevens believes, economists seem pretty chilled on interest rates as is. In a recent poll, just two of 28 prominent analysts forecast a rate cut in December.
Not surprisingly, the Aussie dollar gained in the wake of Mr Stevens comments. It’s trading at a recent high of US$0.72. That came despite commodities hitting a new low. Iron ore slumped to US$43.89 a tonne, its lowest point since July. But the prospect of no December rate cut was enough to perk the dollar up, however briefly.
Here’s what Mr Stevens said on Tuesday night:
‘I’m more than content to lower if it that actually helps, but is that the best thing to do at any particular time? We’ve got Christmas. We should just chill out, come back and see what the data says.’
It’s Christmas, so, what the hell, right? Yet while Australia enjoys its holiday break, the RBA won’t be so lucky. There’ll be a spate of new economic data that should keep the RBA busy.
For one, next month’s employment figures will be worth watching out for. They should provide further guidance on the state of the labour market. On top of which, Q4 consumer price inflation data is due out in January. Both will likely to hasten or delay the RBA’s decision to shift interest rates.
Yet the most important event coming up is the 16–17 December Federal Reserve meeting. It’s no exaggeration to call it the most anticipated central bank meeting in history. At least, the most important one since the last time the central bank met.
US markets expect the Fed to raise rates in December. Quite why they think this remains a mystery. The Fed is notoriously misleading in what it says. It keeps saying the US economy is robust enough to support rising rates. For whatever reason, markets buy this line every single time. Almost without exception, like an obedient lapdog.
So the US will raise rates in December. Or it won’t. No one really knows. Even if they think they do. Not Janet Yellen. Not the other FOMC members. And certainly not the gullible markets.
But it might help explain why Mr Stevens is comfortable enough to tell economists to chill out. It’s as if he’s taking this opportunity in full expectation the Fed will lift. Were that to happen, it would vindicate Mr Stevens’ position.
But the Fed’s disappointed the RBA more than once. The RBA even expressed frustration when the Fed failed to hike rates some months ago.
Nonetheless, the US interest rate decision remains a key reference point for the RBA. Should US rates rise, it’d take some of the pressure of the RBA in going the other way. And, moreover, it’d weaken other major currencies including the Aussie dollar. The RBA want this because, among other reasons, it boosts exports and tourism.
Yet the timing of any US lift off remains uncertain. Markets expect December 2015, but it could just as easily be December 2016. Take a look at what Goldman Sachs had to say a few weeks ago:
‘Our own answer to that question has long been 2016. In fact, our own view is similar to that of Chicago Fed President Charles Evans, who recently shifted his call from early 2016 to mid-2016. Although it is definitely possible to rationalise a December 2015 lift off using various forms of the Taylor rule, there are two good reasons to delay the move longer.
First, the risk of hiking too early is bigger than the risk of hiking too late when inflation is so far below target and we have spent so much time stuck at the zero bound. Second, we have seen a sizeable tightening of financial conditions. At this point, our “GSFCI Taylor rule” suggests that the FOMC should be trying to ease rather than tighten financial conditions. Our own view in terms of optimal policy is quite strongly in favour of waiting well in 2016.’
Then, in a statement shortly after that, Goldman noted:
‘…standard monetary policy rules might justify a continuation of the current zero-rate policy for much longer, well into 2016 or potentially even beyond. In this context, it is interesting that the reduced market-implied probability of lift off in 2015 after Friday’s weak employment report mostly translated into a high probability of lift not in 2016 but in 2017.’
There’s little consensus on this matter. And Goldman is just adding to noise in a market full of cluelessness. But it does highlight that banking on a December lift off is far from certain. Which ensures the pressure will remain on the RBA to lower interest rates in Australia.
As for forecasting any timeframe on this, your guess is as good as mine. Whether it happens in December or not, it is coming. ANZ economist Felicity Emmett is forecasting two cuts in the first half of 2016:
‘Overall, we maintain our view [the] case rate will be cut twice next year by 0.25%, most likely in February and May.’
That seems a good as bet as any. In the meantime, don’t expect any interest rate cut under your Christmas tree this holiday season.
Contributor, Markets and Money
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