The RBA cut their target overnight cash rate 25bps to 3%, as was widely expected prior to the meeting (the market was pricing 23/25bps at Tuesday lunch).
The reasons were domestic this time, with a little more domestic weakness allowing the bank to detune the inflation concerns that held them up in November. The final paragraph did not contain the forward guidance that is typically at the end of an RBA statement — however this is very normal prior to the December break.
The RBA — so far — has been unsuccessful in easing monetary conditions with their December window. The FX and rates markets both over-reacted to the normal lack of forward guidance the December post-meeting statement: the AUD immediately gapped higher, and the bill strip bear-steepened. Interestingly, the OIS market remains priced for a cash rate low of ~2.5% in Q3’13.
Following this cut, It is likely that mortgage rates will fall by ~20bps, to be ~50bps above their GFC lows. It is unlikely, however, that the housing market is going to boom as it did in 2009/10. Without that, i find it hard to see demand growth picking up to be above trend in the non-mining sector — which is what i think is going to be required to offset the weakness i expect in the mining and government sectors.
You could get a sense of this from today’s building approvals data — which showed a 7.6%m/m decline. It was mostly due to the volatile ‘other’ sector, however the ‘core’ private housing estimate also declined by 1.5%m/m, to be only +4.5%y/y. This is very modest growth for the sector that optimists hope will fill the gap left by the fiscal contraction, and decline in mining investment.
Still, we have a cash rate that’s at the all time low, and mortgage rates that are only 50bps or so above the lows — so why am i so pessimistic?
Here are six reasons:
1/ There are no longer extremely generous government incentives to invest in housing.
2/ The restrictions on foreigners purchases of Australian housing have been re-introduced.
3/ The AUD is stable — whereas in 2008 it fell 40% in three months (this was a great support to the luxury housing market, as well as the tradable sector).
4/ Expectations (or animal spirits) for capital gains on housing are much lower.
5/ Lending standards are (modestly) tighter.
6/ The fiscal stance is now modestly restrictive, rather than extremely stimulatory, as was the case in 2009.
These reasons are all apart from the most obvious — that we do not, this time, have an investment boom promised by jaw dropping profitability in a sector. Rather, we have an economy characterised by declining profitability, excess capacity, and weak business confidence.
Given the above, i judge that the probability this is the end of the easing cycle is ~10%.
More likely, the unemployment rate will rise, as GDP slows to be clearly below trend, and that will see inflation test the 2% bottom of the RBA’s range, and allows the bank to cut rates another 100bps over the next year or so.
I don’t normally make GDP forecasts, but a number closer to 0.25%q/q seems more likely to me than the 0.6%q/q the market is looking for when Q3 GDP prints tomorrow (5 December).