Terry McCrann: What you can expect from the RBA on Cup Day
Melbourne Cup Day used to be a popular day for the Reserve Bank to change interest rates and more often than not to raise them. But come this Cup Day it seems all-but certain to be trimmed — or slashed, Terry McCrann explains why.
Terry McCrann
Don't miss out on the headlines from Terry McCrann. Followed categories will be added to My News.
Melbourne Cup Day used to be a popular day for the Reserve Bank to change interest rates and more often than not to raise them.
Indeed, in the decade of the 2000s it announced a Cup Day rate rise no less than five times — most famously in 2007 delivering the first-ever rate rise smack in the middle of an election campaign.
Although there are two former — very senior — politicians who will take their grumpiness about that to their graves, it in fact made not the slightest difference to the election outcome.
Back then, another now also former politician who seemed to have the surname “07” was on an unstoppable roll; nothing was going to stop his journey to The Lodge.
Indeed, even his closest political colleagues hadn’t yet realised what a, let’s be polite, flawed character (and personality, and most of all “leader”) he was.
Now of course, as our most prominent former prime ministerial tweeting twerp, he lets everyone in on “the secret” on a daily basis.
Getting back to responsible adults, no, the RBA board closeted in a building at the top of Martin Place in Sydney (albeit with the most magnificent view in global banking) didn’t choose to raise rates on Cup Day just to steal a bit of thunder — a sort of “look at moi, look at moi” — from Marvellous Melbourne.
Nor were they masochists taking pleasure in hitting everyone with a dose of cold harsh financial reality just 30 minutes before the horses jumped in the Cup.
No, the reason was far more prosaic and predicable. The generally reserved bankers like to “hang” a rate rise on something tangible and understandable — the threat of rising inflation.
The September quarter inflation figures come out the week before (as they will, in this coming week); in each of those years nominated inflation already looked menacing; the governor already had his hand clasped on “the lever”, as another grumpy former senior pollie liked to put it; they did surface menacing; so it was pulled on Cup Day.
Well, that was “yesterday”. Inflation hasn’t been a problem for a very long time. The last Cup Day rate rise was in 2010.
The one in 2007 that got — let’s call them “John” and “Peter” — so riled up took the RBA’s official rate to 6.75 per cent (with home loan rates up to around 9 per cent).
Last Cup Day the RBA left its official rate unchanged at 0.75 per cent. That of course was “pre-virus”. Savers can only look back in envy at that and what they could get, just a year ago, on their bank deposits.
Heading into next week, the RBA’s official rate is just 0.25 per cent; it seems all-but certain to be trimmed — or slashed — to 0.1 per cent.
Actually both words apply. The 0.15 points is the smallest absolute change, up or down, the RBA has ever made. But the percentage cut — 60 per cent, from 0.25 to 0.1 — is the largest change the RBA will have ever made.
Word games aside, the cut itself will be the least effective rate change — almost to the point of meaninglessness — the RBA will have ever made.
Would anyone seriously suggest that such a cut — even if it actually gets to the borrower — is going to transform your ability or desire to chase a home loan?
On the savings side, if you are already determined to leave your money in the safety of a bank deposit getting all-but zero interest; are you going to take it out and chase a higher return on a riskier investment just because you will in future be “only” getting a tiny bit less than all-but zero interest?
So why will the RBA do it? It is because of all the other things the RBA has built around its official rate.
They are two. It buys government bonds in the market to keep their yield also at 0.25 per cent.
It would shift that to 0.1 per cent.
It also lends money to the banks at 0.25 per cent (and again, that would drop to 0.1 per cent) to ensure they can maintain both the volume and (low) rates at which they are on-lending to business and to home buyers.
It is likely to do something new; to push out its buying of bonds and yield-targeting to five years.
A big part of why it is doing all this is to stop the Aussie dollar rising in value against other currencies, because the major central banks have long taken their rates down to zero and in some cases (ECB and BoJ) into the negative.
When you are talking about trillions of dollars a rate difference of even just 5 points (or indeed less) can be a powerful magnet.
But there are major, major downsides. I can fully understand why the RBA feels it has to go to 0.1 per cent; I would prefer it stayed at 0.25 per cent.
PM GOES PEAK STUPID OVER AUS POST BOSS
VICTORIA IS THE DEAD-WEIGHT FOR RECOVERY
Originally published as Terry McCrann: What you can expect from the RBA on Cup Day