News this past week that the Reserve Bank of Australia is growing increasingly uncomfortable with the high Australia dollar suggests the barriers to another interest rate cut has been lowered somewhat further.
In what is fairly terse words from a central bank, the RBA noted in its post-meeting Statement this week that global monetary policy remained “remarkably accommodative.” Elsewhere it noted that “monetary developments elsewhere” have played a role in pushing up the $A of late, which in turn “could complicate the adjustment under way in the economy”.
Of course, we don’t need to be so diplomatic.
What we’re seeing globally is a very timid US Federal Reserve, who is jumping at shadows and remains loath to raise interest rates as required. If global equity prices peel back in the next few months, as I expect, the Fed will be been more reticent about hiking rates.
Indeed, the US outlook could get very dicey very quickly.
Irrespective of what the Fed does, it’s hard to see US earnings picking up much at all due to weak productivity growth. At the same time, the recent equity market rebound has pushed valuations to near the peak levels of earlier last year before markets again nosedived. Sluggish earnings and high valuations are heavy crosses for Wall Street to bear, and the recent good news story of a dovish Fed can only go so far.
The really ugly scenario is if, amidst an equity market correction, US wage and price inflation also continues to stir – after all, the economy is already close to full employment – which will make it hard for the stand pat and keep its Wall Street friends happy.
At the same time, the European Central Bank and Bank of Japan still believe it’s their duty to throw money around, even there’s little evidence to suggest the work so far has done anything to boost the inflation outlook, other than temporarily through lower than otherwise exchange rate.
This is beggar-they-neighbour competitive currency depreciations pure and simple.
All up, we’re looking at a scenario where “risk off” could back into markets globally, which in turn keep monetary conditions accommodative and the $A uncomfortable high. That could be enough to tip the RBA’s hand.
Indeed, to my mind, there’s a reasonable chance the RBA could cut again by August if the next two consumer price inflation reports show price pressures are quite benign. A lift in the unemployment rate back to or above 6% would be icing on the cake. Let’s recall the RBA’s two preferred measures of underlying inflation – the weighted median and trimmed mean – are up only 1.9% and 2.1% respectively over to December. The RBA latest forecasts suggest annual underlying inflation will hold around 2% by the June quarter report due in July.
Although the March quarter CPI report will be released on 27 April, and could provide a catalyst for lower rates, I still think the RBA won’t move until there is clearer evidence of softening in the labour market and a resumption of the earlier uptrend in the unemployment rate. With the ongoing decline in home building approvals, and an apparent levelling off in ANZ job advertisements, we may well already be seeing tentative signs of labour market softening to come. That’s why a rate cut, should it come, is more likely to come later this year.
Note in its Statement this week, the RBA reiterated its view that “continued low inflation would provide scope for easier policy, should that be appropriate to lend support to demand.” (my italics)
