Reserve Bank unlikely to change rates before Melbourne Cup Day

THE Reserve Bank doesn’t want to change its official interest rate any time soon — like, at least for the rest of the year, writes Terry McCrann.

Wall St was primed for a correction.

THE Reserve Bank doesn’t want to change its official interest rate any time soon — like, at least for the rest of the year.

Although I’d circle Melbourne Cup Day — the traditional day for rate changes — at this stage I’d circle it only in orange, not red.

Its US Federal Reserve counterpart across the Pacific, in contrast, does. It wants to raise its rate twice this year, with the first move most probably next month.

If both august institutions “got their wishes”, it would be serendipitous for you.

Apart from the fact that both would be reading their economies accurately — always desirable from people with their hand on “the rate lever” — it would mean we were getting desirable economic and investment outcomes.

You really do not want to see our RBA having to change its rate — either up or down. And you really do not want to see the Fed either postponing its planned hikes, or having to hike more and faster.

It’s all but impossible to see any developments which would cause the RBA to switch to rate hikes over the next few months.

That would require something akin to wages exploding or business going on an investment binge. Not going to happen; we are more likely to see Malcolm Turnbull and Bill Shorten join hands and agree to take the tough decisions the country needs.

Any move by the RBA to do the opposite, to cut its rate, would require either the economy to go seriously sour — broadly, the jobless rate rocketing above 6 per cent — or the Sydney and Melbourne property markets to collapse.

In short, steady-as-she goes would signal the economy ticking over — not booming, but not crashing — and an at least OK (going sideways or slipping only slightly) property market in the big two cities.

In contrast we want to see US rates going up. I’d like to see them going up somewhat faster, but not because the Fed suddenly found itself forced to hike into an out-of-control boom.

But again if we get to the end of the year and the Fed has delivered its two hikes, that would signal we’d lived through the US economy ticking over nicely — and remember, it is still the biggest and most important for the world, if not so directly for us.

It would also mean that the global investment environment had remained in good shape. We do not want to see a US Fed panicked into not hiking because of a plunge on Wall St. Such a plunge would have to be much worse than the 370-point, one-day drop in the Dow we saw midweek.

Simplistic commentators immediately blamed the drop on the turbulence around President Trump.

That might have contributed, but the basic reality was that Wall St was primed for a correction. It had been trading with virtually zero volatility for some weeks, gradually edging higher to near its all-time peak.

Market dynamics meant it was either going to shoot through that record or be clipped. The fact that it came straight back — recovering more than half that drop in the final two days’ trading — suggested that the Trump/Fed positives were still in play.

Some blamed the Dow drop on the turbulence around Donald Trump.

Not so for our market, which as I suggested a few weeks ago had hit something of a brick wall around 6000; and has certainly not been helped by the government’s Budget attack on the four stocks that constitute nearly 40 per cent of it.

Unlike the politicians, the RBA understands the banks will have to “pass on” the new bank tax. They don’t have secret pots of gold in their cellars. If $6 billion is going to come out of the banks, it has to come from borrowers, from depositors, or from shareholders, or as will inevitably happen, some combination thereof.

Now on one level, the RBA might argue it should come from shareholders, but it would not be unhappy to see it come from borrowers — just as it’s “happy” to see the banks pushing up especially their investor borrowing rates to take some of the heat out of Melbourne and Sydney.

So yes, we will see further “adjustments” to actual lending rates, which might aggregate to a formal RBA 25-point rate hike for some borrowers.

My reference to Cup Day is not a (long-term) prediction. Simply, that it’s a long time away — nearly six months in which today’s volatile world everything could change.

But also, even in this potential volatility, it’ll take about that long for some different momentum, local or international, to build up force — absent, of course, some left-field catastrophe. It’s also the meeting at which the RBA has shown a historical tendency to change rates.

As for the Budget, it’s essentially irrelevant to this outlook — for the rest of the year, and for 2018.

Our investment and economic future is being made in Shanghai and Beijing, Washington and Wall St. With some “finetuning” from Martin Place in Sydney.

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Originally published as Reserve Bank unlikely to change rates before Melbourne Cup Day