With the mining boom seemingly well past its peak and with Australian households saving not spending, why is it then that with the economy clearly in need of a bit of a spark the market expects the RBA won’t cut rates tomorrow?
This relates to the big lag between when the RBA cuts rates and when the impact of that rate cut is felt in the economy and seen in the data. That is, what the RBA does with interest rates takes some time to filter through the economy because it takes time for banks to pass on the rate cut. It takes time for people to become comfortable with their new level of interest rate payments and it takes time for the lower mortgage payments to filter into the household psyche to such an extent that there is more spending and less saving.
This is why in the last two months’ statements after the RBA Board meeting, they have mentioned the lag in policy.
“The easing in monetary policy over the past 18 months has supported interest-sensitive spending and asset values, and further effects can be expected over time. The pace of borrowing has remained relatively subdued, though recently there are signs of increased demand for finance by households.”
It is because of this historic lag that even though the economy clearly needs lower rates now the RBA will keep rates on hold.
But with rates at a generational low — and as yet no sign that the RBA’s 2.25% of rate cuts since late 2011 is gaining any traction — what is the RBA to do?
The only thing left is to talk the Australian dollar down – as it did last month when it said in the statement.
“The Australian dollar has depreciated by around 15 per cent since early April, although it remains at a high level. It is possible that the exchange rate will depreciate further over time, which would help to foster a rebalancing of growth in the economy.”
The RBA has a clear bias to ease, they want more monetary accommodation for the Australian economy but for the moment they believe that the best way to achieve this is with a lower Dollar.
Greg McKenna is an active currency trader and is currently short AUD.