Chief economist update: The RBA capitulates


It was a hard slog swimming against the tide, but this space has finally been vindicated by RBA Governor Philip Lowe's change of heart with regards to guidance on Australian monetary policy.

The next move in "interest rates is likely to be up rather than down" is no more! In his address to the National Press Club of Australia - on "The Year Ahead" - yesterday, the RBA governor conceded that: "Looking forward, there are scenarios where the next move in the cash rate is up and other scenarios where it is down. Over the past year, the next-move-is-up scenarios were more likely than the next-move-is-down scenarios. Today, the probabilities appear to be more evenly balanced."

Over the past few weeks, Financial Standard had already published the whys and wherefores for this call here and here; and so we wouldn't torture the data some more.

Sure, Financial Standard has called for an outright interest rate reduction, but a shift to neutral would be the next best thing as explained in the piece titled "Time for an RBA shift to neutral".

The main thesis being: "...a shift in the RBA's stance from "the next move in interest rates is likely to be up" to "neutral" could be enough to turnaround domestic sentiment."

Word quota restrictions prevented your scribe from expounding the point. Points, that we're now witnesses to immediately after yesterday's RBA's shift to neutral. The Aussie dollar exchange rate is down (1.6% versus the greenback) and longer term interest rates are lower: two-year notes fell by nine basis points to 1.71%; five-years down by 10 bps to 1.78%; and, 10-year bonds are 6 bps lower to 2.18%.

Yes Virginia, with a mere shift in the RBA's guidance to N-E-U-T-R-A-L, yields have fallen across the curve.

But special mention goes to the Australian dollar's depreciation - that which had shielded Australia from the downdrafts of the Asian currency crisis and the collapse of Long-Term Capital Management (LTCM) and Russian default in 1997/98; the US recession and the terrorists attacks on the US in 2001 and the global financial crisis in 2008.

It's still too early to tell but if the lower yields on Australian Treasury notes, and more especially, the Australian dollar's depreciation, persist, then calls for steady RBA monetary policy through to late 2020 will be proved correct.

If not, "...lower interest rates might be appropriate at some point. We have the flexibility to do this if needed." - Philip Lowe

Read more: USFinancial StandardPhilip LoweRBA GovernorLong-Term Capital ManagementNational Press ClubTreasuryYes Virginia
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