New global shocks aside, your next interest rate cut is more likely to come from your local bank manager than the Reserve Bank board, but Australia’s economic health in the next financial year seems to be resting on the less-than-robust reed of housing construction.
While the RBA met market expectations by leaving its cash rate unchanged, there was still plenty in governor Glenn Stevens’ brief statement to chew on.
My suspicion is that the banks will continue to shave their lending rates on an individual let-me-do-a-deal-for-you basis.
The above two observations are either between the lines or explicit – as is the drag on the economy posed by governments. That’s “Public spending is forecast to be constrained” in RBA-speak.
The RBA certainly remains dovish. Stevens makes clear that the RBA is willing and has room to trim rates further if the world turns nastier or the local economy doesn’t respond to what’s already been done – his statement is more relaxed than previous efforts about the inflation outlook thanks to the softening labour market and firming unemployment rate. But the board is not in a hurry.
Besides, as Stevens notes: “Sentiment in financial markets has continued to improve, with risk spreads narrowing and funding conditions for financial institutions becoming more favourable.”
That’s the RBA’s stamp on banks’ funding costs easing, which means the banks should have room to trim loan rates themselves, if competitive pressures are adequate.
Given the weak credit growth, the competitive pressure is indeed there, but it’s debatable whether any of the Big Four will break rates with a public reduction in the headline variable rate.
The upside of that move would be the public relations value – daring to be different – but the advantage would be soon lost as others followed suit. The bank that has applied the most pressure, the NAB with the pledge to keep its headline rate below the others, has no incentive to move further than that.
My suspicion is that the banks will continue to shave their lending rates on an individual let-me-do-a-deal-for-you basis instead. Last year they reduced their actual lending rates by more than their headline rates as they tried to lure or retain individual customers.
With a fair whack of every bank’s book suffering inertia, either unwilling or unable to shop around, cutting rates for all would be unnecessarily generous.
As to the bigger question of what happens next to the Australian economy, today’s statement was a much happier document than that of the last meeting.
The world has become a less frightening place over the past two months with the various crises at least looking manageable for the time being and China’s “fairly robust” growth rate confirmed.
But the explicit challenge remains: what sort of demand will pick up the slack as the peak in resources investment approaches and passes? The statement doesn’t hold out much hope for anything other than housing construction picking up as soft monetary policy works its stuff.
With the mines dug and the wells drilled, commodity exports should bring in extra income, but the task of keeping the nation’s economic growth near trend in 2013-14 will increasingly rest on the carpenters’ and brickies’ shoulders.
Meanwhile, the carpenters and brickies are wondering where the new housing buyers and investors might be hiding.
It would be a long bow to draw together Stevens’ sentence about public spending and his mention that interest rates for Australia’s sovereign debt remain “at exceptionally low levels”, but five present or former RBA board members have.
Michael Pascoe is a BusinessDay contributing editor