Terry McCrann: Why you shouldn’t bank on RBA cutting rates
Westpac’s chief economist Bill Evans has joined NAB’s Alan Oster in predicting a rate cut from the Reserve Bank at its next meeting Tuesday week. But there is no good reason for the RBA to make any cuts, writes Terry McCrann.
Terry McCrann
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Westpac’s chief economist Bill Evans has joined NAB’s Alan Oster in predicting a rate cut from the Reserve Bank at its next meeting Tuesday week. I beg to disagree.
There is no good reason for the RBA to make such an – essentially symbolic or ‘tidying up’ – cut; and even less so especially on this particular Tuesday, the day of Treasurer Josh Frydenberg’s delayed budget.
Now, there is no ‘rule’ against the RBA making a rate change on a budget day – just as there is no ‘rule’ against the RBA changing and especially hiking rates in election campaigns.
Budget days and RBA meetings, though, usually don’t coincide. Federal budgets are generally on the second Tuesday in May; RBA meetings are always on the first Tuesday of the month, including in May.
But interestingly and more than a tad bizarrely, they, meeting and budget, will not only be on the same day in two weeks but were on the same day as well last year also.
This year, it’s because of the pandemic: it made no sense to do the budget in May in the middle of all the disastrous economic and health uncertainty. Frydenberg postponed it to October and for whatever reason chose the first Tuesday.
Last year, the coincidence was because of the election. The government called it for mid-May, so it brought the budget forward to the first Tuesday in April, to essentially launch the election campaign.
As it turned out the RBA did leave its rate unchanged at its meeting on the same day. It left it at what was then a record low 1.5 per cent. It is now at just 0.25 per cent – ah, how the world has been turned on its head.
Now, while there is no rule against a budget day rate change, the RBA would still nevertheless need a good reason to change. None of the possible ‘good reasons’ apply right now.
One would be urgency; that the RBA could not ‘wait’ a month until its next meeting; that the economy or financial markets would suffer serious and unnecessary damage by the delay.
Considering that the rate cut being suggested by the two economists is so marginal – from 25 points down to 10 points; and that depending on what else the RBA did, it could turn out to be entirely symbolic: that is to say, not a ‘real’ rate cut at all – ‘waiting’ until Melbourne Cup Day in November would be costless.
A second reason would be wanting to join with the budget to make a ‘big statement’ that the combination would have a big (and hopefully positive) impact on both confidence and the economy directly.
That founders on the same basis. The budget is certainly going to make a ‘big statement’ – with its huge budget deficits. A largely symbolic tiny rate cut would add only a squeak.
That’s to say, add only a squeak on the positive side: arguably it would, even though tiny in size, actually have very serious negative impacts that rather than support the budget stimulus would actually undermine it all.
Now, we are not just talking about a ‘rate cut’ in the normal way the RBA does them. It’s complicated by both the broader structure the RBA has established as its contribution to fighting the post-virus mandatory recession, and the fact that its official rate is right down at just 25 points (0.25 per cent).
The RBA has done three coordinated things, all around that 25 point mark.
It cut its official rate to that level and committed not to raise it pretty much indefinitely.
It is buying Commonwealth bonds in the market to keep the yield on them out to three-year terms at that 25 points.
It is lending up to $140bn to the banks at the same 25 point interest cost.
So what Evans is predicting is that the RBA will rearrange all this around just 10 points. That will be the cash rate; that will be the RBA-driven bond yield; and that will be the interest rate on the money it lends the banks.
Now there are two further twists.
They flow from what deputy RBA governor Guy Debelle detailed in a speech Tuesday which prompted the predictions from the bank duo – as in my opinion, they ‘over-interpreted’ what he had to say.
First, although the RBA has set its official rate at 25 points, the way it’s playing out in the market is that it’s actually running at around 12-13 points.
While the banks’ so-called BBSW rate, which would normally be just above the 25 point official rate, is sitting at around 14 points, just above the 12-13 point actual official rate.
The second twist is that the RBA pays the banks 10 points for any money they deposit with it. Evans says the RBA will cut this to just a single point.
Now on the one hand you could see the RBA formalising what is effectively reality by cutting to 10 points. It would then have to do all the other things to make that 10 points the benchmark.
But there is no great logic in doing so and there is certainly no urgency – especially now that the Aussie dollar has eased in value.
Indeed, the very opposite is the case. Banks are awash with money. And you could hardly say that rates were ‘too high’ for borrowers and potential borrowers.
Arguably such a tweak would be extremely negative for confidence. It would also further – marginally — hurt battered depositors. It could boost savings rather than spending.
There is ‘no good reason’ for the RBA to destabilise.
Originally published as Terry McCrann: Why you shouldn’t bank on RBA cutting rates