After a week where Australia logged one of its lowest periods of inflation, the US Federal Reserve sounded “hawkish”, and the Australian Major Banks (CBA, WBC, ANZ, NAB) upped borrowing rates by 15-20 basis points – Tuesday’s Reserve Bank of Australia meeting was looking like a line ball call.
But it appears the RBA board took notice of the following recent developments when making its decision on interest rates at their Melbourne Cup day meeting.
We’ve written before about how the Australian regulators want our banks to be “unquestionably strong”, and are increasing the capital cushion required for Banks on risk assets.
As part of this new regime, the major banks were brought in to line with the smaller lenders, requiring them to hold more capital against risky assets like loans. Capital can come from a number of sources, and the majors have been busy since April raising billions of dollars of capital directly through share entitlements, and the issue of new hybrid securities. They have also undertaken other measures like increasing interest rates for those with investment only loans, spinning off capital intensive businesses (like ANZ’s Esanda, and NAB’s MLC Life deal announced last week), and now finally… they are making the customer pay. Throughout all of this the majors have fiercely protected their dividends, and therefore their ultimate owners – the share holder.
Australia’s inflation print for the 3rd quarter came in well below expectations at 1.5% annualised, being one of lowest in the last 20 years. The RBA has historically managed inflation to around 2-3%, and at times when it has been higher than this, they have considered raising interest rates. The same can be said for when it is below this range; they have cut interest rates.
With the headline number well below 2% for a second quarter, and growth tracking at a meek 2%, it would seem there is plenty of room for the RBA to lower the official cash rate.
The US Federal Reserve has been oscillating around whether they will leave their interest rates alone, or indeed lift interest rates by 25bps this year to stave off inflationary pressures. To date the “doves” have won, but after last week’s FOMC meeting, the minutes released were deemed “hawkish”. (Recall Dove & Hawk definitions).
Removing the reference to “global developments threatening US growth” suggests a rate rise in December is still on the cards.
This leads to our final point, the RBA always considers currency. With most of their main global counterparts battling deflation and fledgling growth by printing money, Australian bonds look very attractive on a yield basis. This puts pressure on the AUD, as investors sell their currency and buy AUDs – pushing up our exchange rate. With our economic growth coming under pressure, as commodity prices (our biggest export) and Chinese growth (our biggest export market) remain weak, the RBA is favouring a cheaper currency to make Australian exports attractive.
The question on Tuesday was whether they could count on the US Fed to raise interest rates at their December 15 meeting, thereby strengthening the USD and weakening the AUD in one move. Or… will this be too late for an Australian economy tied like a ball and chain to China, already suffering a de facto interest rate hike from the Banks, and with weak inflation causing “real” interest rates to be higher?
Scissors, Rock, Paper!
