Are cuts back on the table?

RBA watcher James Glynn pushed the Aussie dollar and bond yields down on Friday with the explosive story RBA not ruling out rate cut.  This impacted the market as hikes are priced for 2018 and consensus has it that Gov Lowe has basically ruled out further reductions.

I myself think that he would be happy to retire with the cash rate unchanged at 1.5% … and think that this cut stuff is mostly bluster.  However it does bear thinking carefully about what Harper meant.  The key bit is below:

A slump in Australian retail sales in July and August is no cause for immediate alarm, but a response through interest rates could be warranted if consumption across the economy loses momentum entirely, according to Reserve Bank board member Ian Harper.

So why would the RBA worry about a broad based slowdown of consumption?

Because spending has been growing faster than income.  With wealth flattered by house price gains, households have saved less and spent more.  Reflecting this, the household savings rate has fallen over 500bps in the past five years.

With the housing market now flattening out, the risk is that the household savings rate starts to rise once again.  if this were to occur consumption growth would slow below the tepid pace of income growth.  That would be an environment characterized by slow growth and weak firm pricing power.

There is no way the RBA can hit their target of 2.5% inflation in that economy.

Would this be sufficient to get Gov Lowe to cut? i doubt it.

but i certainly do not see the RBA tightening in 2018. The market is priced for the first hike in Q3 2018. That seems about a year too early to me!

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5 Responses to Are cuts back on the table?

  1. Manny says:

    Maybe a few more Pom Poms might help.

  2. nottrampis says:

    great to have you back. They cut rates by say .05%. Big deal. It aint going to do much. If you want to help the economy use fiscal policy.
    It is easy for a Central Bank to reduce inflation but very hard to increase it!

  3. Rajat says:

    Thanks for the post. I agree it is difficult to see the RBA cutting under many scenarios. As a nominal GDP tragic, I wonder what would happen if/when lower commodity prices flow through the economy – for example, if iron ore resumes its downward march. The RBA has been able to wave away low inflation on account of ‘financial stability’ concerns (whatever that means) and the strong growth in employment over the last year. But if commodity prices continue to come off, employment may stall. I agree with Adam Boyton on this. Then Lowe would be under enormous pressure to cut.

    There’s also the possibility that the US may over-tighten into 2019, which would hardly be unusual 10 years into a recovery. Then Lowe may need to make his peace with the ZLB and QE (or negative rates).

  4. nottrampis says:

    hey your mate Cochrane has been the rounds of the kitchen by both Noah smith and Brad De Long.Any comment

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