Interest rate iceberg?

I woke up this morning to a news feed packed to the rafters with calls for, and speculation about, a 50 basis point rate cut from the RBA next month.

Are these people serious?

The RBA has tiptoed cautiously all year, watching closely but holding fire. Just 9 days ago, they met and chose not to move rates.  What has changed since? Nothing, apart from the number of increasingly shrill calls for a cut – although admittedly they are coming from everywhere.  When I last checked, the Cash Rate was not a democracy.  And I’ve never seen an RBA Board minute that said, “Board members gave great consideration to the increasing weight of media commentary…”.

It is highly typical of the news cycle, and of markets, to overreact. Months of steady interest rates in this climate will inevitably lead to panicked calls for big cuts, and to speculation that the RBA might act accordingly. (And of course many if these voices are stating a case for 50 points, purely to try and increase the chances of getting 25.)

But I think everyone needs to have a cup of tea and a lie down. That sort of behaviour is absolutely NOT typical of the Reserve Bank. They steer a big ship, and you turn the wheel slowly. Months of holding a steady course do not suggest a sudden tug at the wheel, with the possible exception of a certain trans-Atlantic liner exactly 100 years ago this weekend.  We may be experiencing some rough seas, but there are no icebergs in the Australian economy and this is not the Titanic. Captain Stevens does not panic. He will turn the wheel gently, down 25 basis points, in May.

Passengers, please return to your cabins.  Now, how about that cup of tea…

Andrew Duncanson is the Research & Insights Director at Mozo.

 

Interest rate iceberg? was last modified: June 29, 2015 by Andrew Duncanson

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