Terry McCrann: RBA sits on its rate — good

The Reserve Bank did not spring the ‘July surprise’ promoted by overexcited market players and retailed by over-gullible journalists.

The RBA’s actions mean you should circle (in orange) Cup Day this year.

THE Reserve Bank did not spring the ‘July surprise’ promoted by overexcited market players and retailed by over-gullible journalists, especially at The Australian Financial Review, and as I noted yesterday was never going to.

Ah well, at least it made for some good trading: the Aussie firmed towards US77c running down to the RBA’s ‘expected’ zinger at 2.30pm, and then dropped straight back towards US76c on the anodyne reality.

Interest rates — correction, and both an important and very relevant one, the RBA’s official interest rate — is firmly on hold (at 1.5 per cent). The RBA is completely disinclined to change it anytime soon or indeed signal any intention to change. Absent ‘events.’

The surprising thing is that any of this should have been the slightest bit surprising. Just because some of the major central banks have started to signal they might start to consider raising their rates.

Indeed, that is precisely what our RBA wants to see happen. More specifically, it is the expectation of those higher rates — especially from the US Fed — which has been and continues to be the absolute basis of its decisions (now 11 in a row) to leave its rate unchanged.

This has been the case at every meeting presided over by current RBA governor Philip Lowe since he took the chair last September; and indeed was put in place by his predecessor Glenn Stevens at his last meeting earlier that month.

In simple terms, there is nothing in either what has been happening in the world, or how the RBA sees its task, to suggest a change of policy course, or the need to ‘prep the market’ to a potential change.

Indeed, in contrast to events in 1945, the situation has developed exactly to the RBA’s (and Australia’s) advantage. That’s both the broader global situation and the domestic mix of economic and financial conditions.

Presumably Lowe will detail all this — and so the RBA’s policy position (as I would put it, of ‘actively doing nothing’) — when he ventures south to appear before the federal parliamentary backbench economics committee in Melbourne later this month.

As I’ve previously detailed there are two diametrically opposed views of where ‘we’ — the world, broadly — are headed.

One sees the world cascading over another precipice every bit as steep and with the landing zone every bit as jagged as that of the GFC — when the multi-trillion dollar debt-fuelled global share and property bubbles blow up.

The other sees a broad, solid if unspectacular, low inflation global recovery spread across all the world’s major economies: the US, Europe, even China and Japan. The major international agencies and the major central banks have signed on to this view. So also has our RBA.

That is the benign (expected) global backdrop to the RBA’s domestically-focused optimism: broadly economic growth picking back up to and exceeding the key 3 per cent level and inflation moving back into the (RBA desired) 2-2.5 per cent range.

Yes, if that all comes to pass, the RBA’s official rate will rise. But not the eight times only suggested (not forecast) by former RBA director John Edwards. And more importantly, not starting now or anytime soon.

Apart from the obvious point: these are as yet unfulfilled expectations of the future, three rather critical points argue against any early move or indeed, the signalling of any move.

One, as we saw with Bendigo yesterday, the banks are pushing up their rates anyway. And in a way that does the RBA’s task for it — on both macroeconomic and macroprudential fronts.

Two, we are starting (thank the Lord, or better still, Stevens) at 1.5 per cent; the Fed started from zero and the European Central Bank is still yet to start, from below zero.

After four hikes the Fed is still below our RBA rate (and the RBA wants it to go above it, to keep the Aussie in the low US70s) and the ECB hasn’t even started yet.

Three, there is nothing in the domestic mix — inflation, wages, business investment, consumer spending, even Melbourne-Sydney property prices — that demands higher interest rates (over and above the ones the banks have targeted on investors).

This all makes the RBA very comfortable at sounding like the proverbial broken record after every meeting. But to also repeat myself: circle (in orange) Cup Day.

THE REAL KEY TO TEN’S FUTURE

LACHLAN Murdoch and Bruce Gordon are doing two things with their ‘proposed bid’ for the Ten Network. The one thing they are not doing is acquiring control of Ten.

No third party is going to put fresh money on the table for Ten until its debt position is resolved.

They are pre-emptively preserving their options and they are (potentially) — depending on your point of your view — exploiting an opportunity or trying to claw back some of their (huge) losses.

The key is that the equity in Ten has been destroyed. The equity-in-waiting, so to speak, is Ten’s debt, which is shared equally between Murdoch, Gordon and James Packer and Packer’s is effectively proxies to the other two.

No third party is going to put fresh money on the table to buy Ten until Ten’s debt position is resolved — even with the improved cash flow that should flow from the licence fee and programming supply cost cuts.

At some point the debt is going to be converted into equity. It is at that point that the ownership comes into play and could be instantly resolved.

Originally published as Terry McCrann: RBA sits on its rate — good