It has been nine weeks since the Reserve Bank met on December 1 and left its cash rate at 2 per cent – enough time for the central bank to take a measured look at the ructions that shook the markets in the first half of January, and leave rates on hold again.
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Rates on hold after RBA meets
As expected, the Reserve Bank has held official interest rates at two per cent. Peter Martin explains why.
Watching and waiting is the right call.
As the Reserve notes, our non-mining economy still appears to be gradually strengthening.
Like everyone else, the Reserve is also waiting to see if China's economy is stabilising, or about to sink into some sort of post-boom crisis: its new, studiously anodyne comment on Tuesday was that China's growth rate had "continued to moderate".
We all also need to see what flows from added central bank stimulus in Europe and Japan, and what looks like being a slower rate rise trajectory than expected in the United States. It has served up soft economic numbers since the US Federal Reserve's mid December rate hike, the first there for almost a decade.
Markets that were plunging in the first half of January on fears that China's economy was stalling are also more stable now, giving the Reserve thinking time.
The Australian dollar was US73.43¢ on December 1. It went as low of US68.5¢ in mid January as the China growth scare roiled the markets but was back around US71¢ before the Reserve's meeting on Tuesday. It rose a quarter of a cent on the news, and then fell back to US70.8¢. No drama there.
The S&P/ASX 200 share index was at 5266 when the Reserve met on December 1, sank to 4841 points in mid January, but was back above 5000 on Tuesday ahead of the rates decision. Wall Street's S&P 500 share index is 7.3 per cent lower than it was on December 1, but is 4.3 per cent above its January low.
China's sharemarket is down about 21 per cent since the Reserve's December meeting, but it's a casino, and China's economic numbers continue to be mixed rather than definitely damning. A purchasing managers' index result that triggered January's global sell-off was updated on Monday. It was weak again, but did not cause another sell-off.
West Texas Intermediate oil was just under $US40 a barrel when the Reserve met nine weeks ago. It is 25 per cent lower at $US30 a barrel now, but has risen from $US26.55 a barrel since January 20, and at these levels is a global growth catalyst. Iron ore meanwhile is just over $US43 a tonne, compared with just over $US40 a tonne on December 1.
Given all that, inaction was the right action for the Reserve on Tuesday. The local economy is doing OK, and while the world isn't charging ahead, it isn't a basket case.
Here comes BHP's dividend cut
S&P's decision to cut BHP Billiton's credit rating from A plus to A and put the resources group on notice that it could cut the rating again if BHP continues to hold dividends up as commodity price falls pressure its cash flow guarantees that BHP board will slash the payout to shareholders when it announces its December half profit result on February 23.
The group's so-called progressive dividend policy aims to increase or at least maintain the payout to shareholders, but by November last year chairman Jac Nasser was warning that the balance sheet had top priority. Its biggest shareholders agree.
The theory then was that the dividend cut would come in August this year, when BHP reported on its June year result. That was based on the fact that in recent years BHP has boosted its dividend in the second half of its financial year, carrying the new payout level over into the first half of the next year.
That's a convention that hangs off the progressive dividend, however. If the progressive dividend is being set aside the dividend timing sequence is too. There is no reason why BHP wouldn't cut the payout when it reports this month, and S&P's warning that its rating could be cut again to A minus if it does not is a reason why it should.
The new single A rating will be the line in the sand, and at its current share price BHP could cut the dividend by 50 per cent and still be on a yield of about 6 per cent. BHP will cut capital expenditure too as it conserves cash – but speculation that it will launch a massive capital raising is wide of the mark.