RBA responds...with a damp squib

Readers may recall recent action taken by the Reserve Bank of New Zealand to counter rising property prices in New Zealand and prevent a housing price bubble which could throttle the economy (link here).  And not to be outdone, the central bank of Australia, the RBA has responded with...some strong words! (or as we call them, a damp squib!):

the RBA has told the big banks that a housing price boom is currently its "greatest fear" as prices are already high by most world standards (here).

Meanwhile growing calls for real action in the form of loan to value restrictions could lead to the RBA doing something concrete.

And it should not be forgotten the opposing forces in play - how likely is the RBA to raise interest rates to kill the property bubble if that pushes the economy into terminal decline and only exacerbates the inflows which fuel the speculative property bubble?  

About that interest rate cut...

Easing interest rates is THE central bank game in town according to FT Alphaville:

...other big Asian currency war battlers, Australia and New Zealand.

The RBA cut its rates on Tuesday, citing the room afforded by new inflationary data, plus some stronger words on the exchange rate. The next day, New Zealand’s central bank declared it was intervening in its own too-strong currency. Both have their own problems with high asset prices: Australia’s central bank might sound less worried about this just now as growth has slowed, but it’s not ignoring the risk. In New Zealand, house prices are such a worry that the central bank is tightening rules on risk-weighting of mortgages and loan-to-valuation ratios.(here).

Bloomberg picked up on the inherent paradox of apparently increasing jobs undermining the RBA's (and RBNZ's) rate cuts:

Australian industry has been squeezed by the currency’s longest stretch above parity with theU.S. dollar since it was freely floated in 1983 that has made tourism more expensive and exposed local manufacturers to cheaper imports. Rosella, a 117-year-old saucemaker, announced its closure at the start of March, leaving 70 workers without a job. General Motors Co.’s Holden division said last month it will cut about 500 jobs in Australia, citing currency devaluations in competing markets.(here)

and the job figures could apparently be prone to errors:

Australia’s jobs data has swung from gains to losses in the past three months. April’s 50,100 rise was preceded by the loss of 31,100 jobs in March and the addition of 71,700 in February.
“The last couple of months has seen a higher than usual amount of sampling volatility,” said Andrew Salter, a Sydney-based foreign-exchange strategist at Australia & New Zealand Banking Group Ltd. “The market has certainly priced out some RBA easing but I don’t think there’s going to be a view change on the basis of one month’s data. Certainly the trend in the unemployment rate, still being higher, is consistent with the RBA’s outlook.” 

Will Australia rebalance? Has any economy rebalanced?

No and no.  Not in the short term anyway.  Whenever you read about politicians and/or bureaucrats having to engineer a rebalancing or engineer a soft landing, you know they will not succeed.  An excellent FT article paints the picture: 


...many forecasters are still worried. They do not believe business investment will be a major driver of growth and argue the Australian economy will have to rely even more heavily on housing construction to meet the RBA’s 2013 GDP growth forecast of 2.5 per cent....As such, they reckon the central bank, which has lowered its benchmark cash rate by 175 basis points since November 2011, will be forced to cut again to stimulate demand....

....“I think we are more of a quarry than what we were 50 years ago and that worries me. The strong mining cycle can’t last forever, that’s inevitable,” Bob Every, the chairman of retail and resources conglomerate Wesfarmers, told a gathering of business leaders in Sydney earlier this month. (here)

The one eyed central banker

Interesting statements from Deputy RBA governor Phillip Lowe that high AUD has been a boon for Australia.  In classical theory a high currency slows imports and curbs inflation.  But this analysis ignores hot money flows and asset bubbles....

..."Had we not experienced the sizeable appreciation (in the value of the Australian dollar) over recent years, it is highly likely that the economy would have overheated and that we would have had substantially higher inflation and substantially higher interest rates," he told an economics forum in Sydney on Tuesday...

Well possibly, but globally inflation is low and interest rates are at rock bottom and the rest of the world...

...."At the moment though, the available evidence does suggest that lower interest rates are doing their work broadly as expected." (here)

This is a very narrow analysis.  Will Dr Lowe agree with this analysis when the hot money recedes, the currency drops and low interest rates fail to stimulate as is occurring elsewhere?

RBA in numbers

Interesting data out via a Bloomberg FOI request (via FT Alphaville).  Some detail of foreign holdings of AUD (in particular central banks) and the way RBA goes about determining the extent of overvaluation.

....The staff's preferred model is based on the long-run relationship between the real exchange rate and the terms of trade and the real policy rate differential with the G3 (US, euro area and Japan) over the post-float period. It suggests the exchange rate is around 5 per cent overvalued.......While the bank has signalled that the dollar has been a factor in deciding recent rate cuts, and there's been a bit of 'passive intervention' with a chunk of foreign currency, so far it does not seem to have done much....

...We have to wonder how much of the central bank's low-key response to the AUD's overvaluation is because officials genuinely think the Australian economy can cope, and how much of it is because doing anything about it is too damn difficult. The RBA is already in a cutting cycle but slashing rates very low would risk inflation. Going Swiss is not an attractive option for small economies that have inflationary pressures; as the New Zealand central bank governor outlined last week....(here)

Fair enough but what is likely disturbing is that there are well a couple of assumptions in play, particularly that i) the high AUD hasn't had an impact yet (arguably it has) and ii) the RBA still has control of its currency

...In that scenario, how long might it take before even a 'moderately' overvalued currency takes its toll? We also can't help noting that the central bank of New Zealand, a much smaller economy in a very similar predicament, has decided that despite the risks it is time to go a little harder by explicitly threatening intervention .... RBA governor Glenn Stevens says that if things get really bad, a strong Australian dollar probably would cease being a problem....

What if the AUD doesn't fall or falls very abruptly?  There is a currency war after all. And in case you are wondering whether imports (including outward tourism) are on expanding too rapidly, symptomatic of an overvalued currency, then read this.

RBA fighting a phoney war

Well certainly not a currency war.  As twitter posts have been appearing with news that Malaysia has joined the currency war, RBA board members are now talking about the possibility of joining - following other nations to lower their interest rates....Roger Corbett got a mention (here) as did Guy Debelle...

...‘To date in Australia, we have been able to counter the effects of the higher Australian dollar with lower interest rates,’’ he said in a speech to the University of Adelaide Business School. ‘‘We still, obviously, retain scope to lower interest rates further, should the need arise, including to counterbalance the pressures of an elevated exchange rate.’’....But Mr Debelle warned that cutting interest rates too far could also create problems for the economy - forcing up the price of assets and causing people to borrow more than they could afford....(here).

This is for an economy where there is already a bursting property bubble and asset price trend.

Meanwhile even the RBA is admitting the Aussie dollar is overvalued, but not by much they say!

....THE Australian dollar was overvalued by as much as 15 per cent late last year according to modelling released by the country's central bank....The local currency was between 4 per cent and 15 per cent over valued in September and about 7 per cent above fair value in December, papers released by the Reserve Bank of Australia under the Freedom of Information Act showed....Even so, the central bank papers said the currency wasn't having a "highly contractionary" affect on the economy...(here)

(the Economist calculated the overvaluation at 60% recently).

Oz property is bust...

Some distance away from the squabble about rate cuts being passed on by the banks, a fairly significant assessment from the New York Times of the much broader picture, namely that the property market overall is slowing, and in quite a big way - not a panic yet, but few signs of optimism.

....Data released Monday by the Australian Bureau of Statistics showed that the number of home loans taken out in December had dropped 1.5 percent, the third straight month in which that number fell, and a five-month low....Annual growth in housing credit slowed to an all-time low of 4.5 percent at the end of 2012, a long way from the double-digit pace common in the previous two decades. Indeed, growth peaked at no less than 22 percent in 2004. ....“Most economic indicators remain far weaker than they normally are this far into an interest rate easing cycle, suggesting monetary conditions are still too tight,” Mr. Oliver said.....(here).

The failure to pass on rate cuts is an issue of the banks, but note that it reflects on the banks' own capital weakness.

....Lower variable rates would have a much bigger effect on housing demand, and there are signs that intense competition is driving banks to offer better deals....But the banks are reluctant to ease any further on their own, because much of their funding comes from deposits, rather than markets, and rates on those accounts remain relatively high.....competition for that money is fierce, making it costly. Rates on bonus saver accounts, with higher interest rates, have increased by 2.5 percentage points relative to the cash rate since 2009...