RBA Rate Cut Creates Few Market Winners as Policy Limits Chafe

Economists Warn on Australia Rates
  • Australian dollar rose to a three-week high in wake of easing
  • ‘Zero measurable macro impact’ from cut: Nomura’s Ticehurst

The Reserve Bank of Australia’s decision to cut interest rates last week has so far produced few clear winners.

The Australian dollar, a “significant source of uncertainty” for the central bank, remains the strongest major developed currency this quarter, while stocks and bonds have fallen. With Glenn Stevens about to enter his final month as governor and the cash rate at a record-low 1.5 percent, the RBA’s actions are having less impact than they once did, a problem that’s plaguing many of central bankers around the world.

The RBA is aiming to drag the country out of a disinflationary spiral, yet it’s predicting consumer price gains will remain below its targeted range after it eased. The benefits of the rate cut for borrowers will be more muted than policy makers may have hoped, with the nation’s biggest banks opting to pass on only about half the 25 basis-point reduction to mortgage and business customers.

“I believe zero measurable macro impact will come from this latest rate cut,” said Andrew Ticehurst, a strategist at Nomura Holdings Inc. in Sydney, citing the effect of the Australian dollar’s resilience and the response from major banks. “We’re getting to the point too where rate cuts are having absolutely marginal beneficial impact. The Reserve Bank has very limited remaining ammunition.”

Quarterly Statement

The RBA left its growth and inflation forecasts little changed in a quarterly statement released Friday, predicting the economy will expand 2.5 percent to 3.5 percent this year. Core inflation is expected to remain below 2 percent for most of the forecast period through 2018.

The Australian dollar climbed to a three-week high on Friday following the statement. It was at 76.11 U.S. cents as of 1:03 p.m. Monday in Sydney, 1 percent stronger than it had been a week earlier. The Aussie has strengthened against all its Group-of-10 peers since June 30.

The S&P/ASX 200 index of stocks has fallen 0.3 percent from its close on July 29, while the yield on the benchmark 10-year bond has climbed eight basis points to 1.95 percent.

Following the RBA’s rate cut on Tuesday, the nation’s four biggest banks said they would reduce their variable borrowing rates by 10 to 14 basis points, while increasing those on selected term deposit products. 

Their choice to favor savers over borrowers complicates the transmission of RBA policy through the economy as it seeks to stoke inflation and business investment.

While Adrian Blundell-Wignall, an official at the Paris-based Organisation for Economic Co-operation and Development, said the cut was necessary to stop yield-hungry investors driving up the currency, the RBA chief leaves his successor Philip Lowe with limited policy ammunition to combat further gains.

“There is now the risk that the markets expect the RBA to take a preordained path to ease after each CPI report,” said Annette Beacher, head of Asia-Pacific research at TD Securities in Singapore. A pause on Tuesday would have mitigated that threat, she said.

Melbourne Cup

The government will release third-quarter inflation data on Oct. 26, a week before the RBA meets Nov. 1, the same day as the renowned Melbourne Cup horse race. Eight of the 25 economists surveyed by Bloomberg predict policy makers will cut rates at the gathering by another quarter percentage point to 1.25 percent. Lowe, who will take the helm in mid-September, has indicated that lowering the benchmark on its own would lose effectiveness as it approaches 1 percent.

Stevens may discuss in a speech in Sydney this week the limits to what can be achieved with monetary policy, said Kieran Davies, an economist at Australia & New Zealand Banking Group Ltd. in Sydney. The central bank will look “more closely at unconventional options” should the economic situation worsen, he wrote in a note to clients.

“The RBA thought the likelihood of using such options was very remote, but we are much less sure given the cash rate is close to the RBA’s 1 percent floor,” he said.

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