Reserve Bank might fund mortgages: bank official

A senior Reserve Bank official has raised the prospect of buying mortgages to keep the economy afloat during the next recession.

Leon Berkelmans monitors financial markets for the bank and shared what he said were his personal thoughts at a conference in Canberra organised by the Melbourne Institute of Applied Economic and Social Research.

The bank has kept its cash rate steady at an all-time low of 1.5 per cent for a record 20 months, leaving it little room to cut further should the economy turn down.

Dr Berkelmans said it might be possible to cut the cash rate below zero, as central banks had done in Japan and Europe. But cutting too far below zero would see retail banks withdrawing their funds from the Reserve, leaving its cash rate impotent.

Central banks in the United States, Britain, Japan and mainland Europe had pumped cash into their economies by buying government and corporate bonds when they could no longer cut interest rates, a process known as quantitative easing.

As a “thought experiment” he outlined the options available to the bank, although he stressed it had no official position and to the best of his knowledge hadn’t wargamed what it might do.

“Let me be very clear,” he said. “The Reserve Bank is not planning on engaging in quantitative easing anytime soon, so please do not form the impression that at the next board meeting they will be discussing it. They will not.”

“But, just as a thought experiment, the bank would need to buy securities.”

Japan’s central bank owned securities worth 90 per cent of an entire year’s gross domestic product. The European Central Bank had securities worth around 40 per cent of gross domestic product. The US Federal Reserve owned securities worth 30 per cent of GDP.

The Reserve Bank of Australia only owned securities worth about 10 per cent of Australia’s GDP.

“Let's engage in a thought experiment. Again, this is just a thought experiment,” he said. “This is not the what the Reserve Bank is thinking of doing right now.”

“Suppose that we wanted to engage in episode of quantitative easing that would result in the bank’s balance sheet going up as much as did the European Central Bank’s; to 40 per cent of GDP. We would need securities worth another 30 per cent of GDP.

“What would 30 percentage points look like? In net terms the entire stock of Australian government bonds in the market amount to 30 percentage points of GDP.

“We would need to go out and buy every single Australian government security, and there are many reasons why we might not want to.

“So again, in the spirit of a thought experiment, what else could we go out and buy?

“There are asset-backed securities, primarily residential mortgage backed securities.”

The US Federal Reserve bought residential mortgage backed securities during the financial crisis of 2008 to 2009.

It ensured the mortgage market continued to function and gave cash to the institutions that sold that they were able to use elsewhere. It meant the Federal Reserve rather the previous owners became entitled to the mortgage payments that lay behind the securities, effectively making it a mortgage funder.

There was a risk that Australian wouldn’t have enough residential mortgage backed securities on offer for the bank to buy. There were half as many as before the financial crisis. But overseas experience had showed that the central bank was a buyer more were created, making mortgages more available and supporting the economy.

Dr Berkelmans stressed that the bank had no official position on what it might do.

His idea was quite distinct from a proposal floated by the Australian Greens for Reserve Bank to provide residential mortgages. Mortgages would be bought at the wholesale level rather provided at the retail level.

Board minutes released on Tuesday said it was more likely the next move in the bank’s cash rates “would be up, rather than down” depending on further progress cutting the unemployment rate and boosting the inflation rate. Figures released on Thursday showed the unemployment rate steady at 5.5 per cent in March for the third consecutive month.

In The Age and Sydney Morning Herald

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An inconvenient truth: you're paying less for your mortgage than a decade ago

Record-low mortgage rates have made it easier to meet the payments on home loans than it has been in decades, despite record-high house prices, new figures show.

Confounding talk of unaffordability, the Bureau of Statistics calculations show that as recently as 2005-06 it took an average household 19 per cent of its gross income to meet ongoing housing costs. By 2015-16, it had fallen to 16 per cent, the least in records going more than 20 years.

The average mortgaged household now spends less of its income on housing than it does on food, a turnaround from earlier surveys in which it spent more. Housing costs include mortgage payments and water and rate payments.

Adjusted for inflation, the average mortgaged household paid $434 per week in 2015-16, much the same as in 2005-06. But over the same period the average income of mortgaged households climbed from $2272 per week to $2759.

"Mortgage and property values have also increased in the last decade," said Dean Adams, the Bureau's director of household characteristics and social reporting. "Ten years ago, the real median dwelling value was $449,000, which climbed to $520,000."

Mr Adams said the burden imposed on mortgaged households might be even lower than the survey suggested.

"Our survey measures what they chose to pay in mortgage costs, not what they had to pay," he said. "As rates have come down, some will have spent more than they need to in order to get ahead on their loans."

Canberra is the easiest city in which to pay off a mortgage, with monthly payments of 15 per cent of income, a near record low. Darwin is the most expensive, with monthly payments of 18 per cent. Sydney and Hobart have monthly payments of 17 per cent, and Melbourne, Brisbane Adelaide and Perth monthly payments of 16 per cent.

Housing costs have deteriorated for renters. The average cost for households renting privately is $350 per week, less than the $452 cost for mortgaged households, but as a record high of 21 per cent as a proportion of income, up from 19 per cent ten years earlier. Renters in public housing pay less again, $167 per week, but the cost also amounts to 21 per cent of household income.

Private renters are worst off in Hobart, paying 22 per cent of household income, and best-off in Darwin, paying 19 per cent. Sydney, Canberra and Adelaide renters pay 21 per cent, and Melbourne, Brisbane and Perth renters 20 per cent

The best-off Australians are those who own outright who typically spend just $51 per week on housing; 3 per cent of their incomes.

The proportion of households renting privately has climbed to 25.7 per cent, the highest on record. Twenty years ago it was 19 per cent. The proportion renting public housing has slid from 6 per cent to 3.6 per cent, and the proportion owning or buying homes has slipped from 70.9 to 67.2 per cent.

Among home-owning households the proportion that have paid off their mortgages has fallen dramatically, from 42.8 per cent of all households to 31.4 per cent.

The proportion of older households still paying off mortgages has tripled in the past ten years, climbing from 7 per cent to 21 per cent.

Grattan Institute chief John Daley said the most important finding was that low-income households were increasingly stressed. The poorest were now spending 28 per cent of their income on housing, compared to 23 per cent ten years ago. Most middle earners there had seen little change.

Two out of every nine homeowners owned more than one property, either for use as a second home or for renting out. One in 14 owned more than three.

The number of people per home fell from 2.7 in 1995–96 to 2.5 in 2005–06, but has since climbed back to 2.6.

The number of bedrooms per household climbed from 3 to 3.2. Four out of every five homes have at least one bedroom to spare.

In The Age and Sydney Morning Herald

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Lowe signals the end of the road for interest rate cuts

Reserve Bank governor Philip Lowe has handed over the baton of economic management, declaring in a speech titled The Next Chapter that there's not much more he can do to boost the economy.

Delivering the speech in Perth, Dr Lowe said "other forces" were likely to be more important than Reserve Bank decisions about interest rates from here on.

"Monetary policy has an important role to play in supporting the economy as it goes through the current period of adjustment," he said. "It can also help stabilise the economy when it is hit by future shocks. It can make for a more predictable investment climate by keeping inflation low and stable."

"Having a competent, analytical, transparent and independent central bank can also be a source of confidence in the country.

"But beyond these effects, monetary policy has little influence on the economy's potential growth rate."

In his first year in the job Dr Lowe has kept the Reserve Bank cash rate at 1.5 per cent, the record-low he inherited.

Although by no means signalling that he was preparing to raise rates, Dr Lowe said the period of extraordinarily low global rates was drawing to a close.

"Some normalisation of monetary conditions globally should be seen as a positive development, although it does carry risks. It is a sign that economic growth in advanced economies has become self-sustaining, rather than just being dependent on monetary stimulus.

"A rise in global interest rates has no automatic implications for us here in Australia. Notwithstanding this, an increase in global interest rates would, over time, be expected to flow through to us, just as the lower interest rates have. Our flexible exchange rate though gives us considerable independence regarding the timing as to when this might happen."

What would matter most for the economy was changes in technology and growth in Asia.

"In some quarters there is pessimism about future prospects for the global economy," Dr Lowe said. "The pessimists cite demographic trends, high debt levels, increasing regulatory burdens that stifle innovation and political issues. They see a future of low productivity growth and only modest increases in average living standards.

"It is right to be concerned about the issues that the pessimists focus on, but I am more optimistic about the ability of technological progress to propel growth in the global economy, just as it has done in the past. The challenge we face is to make sure the benefits of technological progress are widely shared."

The US had a crucial role to play. A retreat from the rest of the world would make Australia's future "more complicated".

The bank was worried about low growth in incomes, something Dr Lowe identified as a problem despite a claim from Treasurer Scott Morrison that incomes were improving.

"For much of the past two decades, real national income per person grew very strongly in Australia, Dr Lowe said. "We benefited from strong productivity growth, higher commodity prices and more of the population working.

"In contrast, since 2011 there has been little net growth in real per capita incomes. This change in trend is proving to be a difficult adjustment. The solutions are strong productivity growth and increased labour force participation.

"Over the past four years, the increase in average hourly earnings has been the slowest since at least the mid-1960s. This is partly a consequence of the unwinding of the mining boom but there are structural factors at work as well. The slow growth in wages is putting a strain on household budgets."

The bank was also concerned about high household debt and housing prices. Australians were coping well, but as debt had increased relative to incomes so, too, had the medium-term risks.

Households were less inclined to let consumption growth run ahead of income. Higher debt also meant that household spending was more sensitive to interest rates, something the bank was "paying close attention to".

In The Age and Sydney Morning Herald

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Forget rate cuts. RBA chief Philip Lowe overrules his staff

Reserve Bank governor Philip Lowe has no plans to cut interest rates, and worries that if he did, he would make an already indebted nation "more fragile".

Appearing before a parliamentary committee after five months in the role, Dr Lowe conceded that others in the Bank took a different view.

"People on my own staff argue this," he told the hearing.

"The counter-argument is that lower interest rates would mainly work through encouraging people to borrow more. That would probably push up house prices a bit more, because most of the borrowing would be borrowing for housing."

"Household debt is at record levels. Is it really in the national interest to get a little bit more employment in the short-term at the expense of encouraging that fragility?"

Dr Lowe pointed to "green shoots" of economic recovery, even in the poorest-performing state, Western Australia.

"The headwind from falling commodity prices turned into a gentle tailwind as commodity prices lifted," he said. "And the headwind from falling mining investment should blow itself out before too long."

Offering a "personal perspective" on house prices, he said he had two teenage children who would soon need places to live.

"I'll be OK because I am paid a lot of money," he said. "But high prices are entrenching inequality."

In the days of higher wage growth, it was much easier to pay off a home loan. With wage growth now near 2 per cent, buyers were forced to bear the burden of high payments for much longer.

Tightening the negative gearing and capital gains tax concessions would take some heat out of the market.

While negative gearing by itself wasn't the issue, in combination with capital gains tax discounts, it fuelled investor buying, which pushed up prices.

It was too early to tell how the policies of US president Donald Trump would affect Australia and the global economy, but the biggest risk was that he would erect barriers that wound back international trade.

"We will be the big losers if that deteriorates," Dr Lowe said. "Our ability to sell our minerals, and our services to the rest of the world, is critical to our standard of living."

"The idea that we make ourselves wealthier by erecting barriers, it's crazy."

Governor Lowe understood the argument for a lower company tax rate but wasn't advocating it.

"Since the financial crisis other governments have been talking about company tax rates as low as 15 to 20 per cent," he said.

"You could argue that from a global perspective that is not useful. But that's not the world that we live in. The choice for the Parliament is whether to respond."

"Australia has lots of advantages and firms come here for a lot of reasons, but tax is a consideration, and I think if you are uncompetitive you will probably get a few less dollars of capital formation from foreign firms.

"It's a choice for the Parliament. It's a decision about foreign, not Australian investment, because dividend imputation makes a tax-cut effectively irrelevant for Australian companies".

In The Age and Sydney Morning Herald

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Steady at 1.5%: Reserve thinks it won't need to cut again

Don't bet on another interest rate cut.

Behind the typically bland language used by Reserve Bank governor Philip Lowe to explain Tuesday's decision to keep the cash rate on hold ("the board judged that holding the stance of policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time") lies a belief that things are about to pick up.

That's what he'll forecast in his first quarterly statement to be released on Friday, and what his predecessor Glenn Stevens forecast in his final quarterly statement released in August.

Developments since August have strengthened Lowe's confidence.

After sliding since 2013, the underlying measures of inflation have been steady at an annual rate of about 1.5 per cent for three quarters. After sliding since 2011, private sector wage growth has been broadly steady for four quarters.

Commodity prices are no longer sliding. They've been climbing since May, and they climbed another 9.5 per cent in October.

While the RBA doesn't think they'll continue to climb for too much longer (some of the recent increases in the contracted prices of coking coal have been too good to be true and dependent on temporary conditions in China), it doesn't expect commodity prices to fall back to where they were at the time of the May budget. They are not likely to depress wages and prices as they once did.

Mining investment has slid so far the RBA believes it's about to stop.

When that happens, it'll no longer be depressing employment, and the employment figures themselves aren't bad, even if part-time jobs are replacing full-time jobs. The bank believes having a job - any sort of job - is a lot better than not having one at all.

And it has received encouraging news from the retailers it talks to as part of its business liaison program. They say they are beginning to claw back pricing power.

After squeezing their margins in food, alcohol, clothing and luxury goods for ever so long, they are starting to feel they can charge a bit more.

If things continue like this, inflation will recover all by itself and the economy will grow at a healthy pace of around, then above, 3 per cent.

Lowe can leave the cash rate at 1.5 per cent. Things might change, they often do. But that's his central case.

In The Age and Sydney Morning Herald

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Why 'mortgage tilt' means you might never pay off your home

What can you do when your dreams come true,
and it's not quite like you planned?

- Don Henley, Glenn Frey

Anyone would have thought Philip Lowe had it made. The new Reserve Bank governor has taken the helm at a time when the Bank's traditional enemy, high inflation, is dead. He says he is the first to have done so. Yet he is worried by the fruits of that success.

If you're wondering what could possibly be worse than high inflation, the answer is "very low inflation". It may not destroy savings or spiral upwards, as inflation did when it soared to 18 per cent in the middle of the 1970s, but it can do things that are worse.

It can leave sellers – be they workers, manufacturers, retailers, importers or whoever – without power. And without power, without the hope of extracting higher prices, businesses have little reason to invest. Japan has been lumbered with extremely low inflation for most of the past two decades. They are called the "lost decades" because businesses and consumers have kept their wallets shut.

It's not like that here, not yet. But the household saving ratio, which was close to zero when inflation was high before the global financial crisis, has shot up to 8 to 10 per cent. Like low inflation, high saving is good – we've forever been exhorted to do it – but too much of a good thing can stop the economy turning.

On Tuesday, in his first speech as governor, Lowe explained that headline inflation had fallen to just 1 per cent – the lowest, with two brief exceptions, since the recession at the start of the 1960s. So-called underlying inflation is the lowest in records dating back to the start of the century, at 1.5 per cent.

It's fallen because producers and workers worldwide lack pricing power, in part because globalisation has exposed them to competition from producers and workers from elsewhere who will do the job for less. Information technology means that these days service industry workers such as academics, journalists, accountants and financial planners are no longer safe.

The Bureau of Statistics wage price index grew by just 2.1 per cent over the past year, the least since it began in the late 1990s. Lowe says when the Bank and the Bureau examined the individual records for each of the 18,000 jobs that make up the index they discovered that wage rises were happening less often, and that in most industries were smaller.

"The decline in the average size of increases is largely due to a very sharp drop in the share of jobs where wages are increasing at what, by today's standards, would be considered a rapid rate," he explained. "Six years ago, almost 40 per cent of jobs received a wage increase in excess of 4 per cent. Over the past year, less than 10 per cent have got that type of increase."

You might be thinking that low wage rises aren't a problem so long as prices are increasing by less. But that ignores a little-recognised phenomenon known as "mortgage tilt".

When you take out a mortgage in a world of high inflation, your payments are "front-end loaded". That's a technical term used by the former governor Glenn Stevens and the head of his financial stability department Luci Ellis to describe the phenomenon where payments used to start high, but then fall as a proportion of income with each wage rise.

In a world of low inflation the "tilt" becomes much less severe. If repayments consume a large proportion of your wage at the start, they'll keep doing it for decades. Ellis says the banks either haven't caught on to this, or don't want to own up to it. They use the same formulas to assess how much they'll lend as before. They link repayments to income. And because low inflation means low interest rates, repayments are lower than they used to be for any given loan, meaning they can lend more. The result is higher house prices, and harder-to-repay loans.

Even the head of the treasury complained on Wednesday that houses were becoming impossible to afford (and he could have added, impossible to pay off).

If anything the "tilt" matters more for businesses. They are not as easily fooled as homebuyers. Knowing there's little chance of their repayment burden shrinking if they can't push up prices, and believing they won't be able to push up prices, they become much less keen to borrow, however low the interest rate.

They become less keen to invest and to take on more workers.

In May the budget forecast a rebound in non-mining investment of 3.5 per cent this financial year. The latest investment intentions survey shows non-mining businesses expect instead to cut investment 14 per cent.

To the extent that "tilt" is one of the reasons, deeper cuts in interest rates won't much help.

We've a problem, one born of success. Low inflation looks good, until you're in it.

In The Age and Sydney Morning Herald

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ASIC chief: The banks are having us on over tracker mortgages

Australia's top financial regulator has dismissed as self-serving arguments by the big four banks that they can't afford to offer so-called "tracker mortgages" whose rates would automatically rise and fall in line with the Reserve Bank cash rate.

Westpac, the Commonwealth, ANZ and National Australia banks each argued in parliamentary hearings earlier this month that there would be little demand for tracker mortgages of the kind that are offered in the United States and Britain because they would have would have to charge too much for them.

In testimony on Wednesday, Australian Securities and Investments Commission chairman Greg Medcraft tabled a 10-page briefing note he said showed each of the bank's funding costs "completely tracked" the cash rate.

"And the reason for that is not really rocket science, it reflects the fact that 60 per cent or more of their funding comes from deposits, which are based on the cash rate," he said.

"Where they get it wrong on funding, that risk shouldn't be passed to the borrower. All a tracker rate would mean is having, like in most parts of the world and in corporate Australia, a rate that is a simple margin over a benchmark."

On Monday, a small Queensland bank, Auswide, launched what is believed to be Australia's first tracker loan, offering 3.99 per cent, which would vary only in accordance with the cash rate.

The rate cannot fall below 2.49 per cent - which it would hit if the Reserve Bank cut the cash rate to zero.

Mr Medcraft said the fixed margin would last for the entire life of the loan, a better deal than was offered overseas, and said that if a little bank could do it, "a big bank can do it".

"It may be technically correct, as the banks have argued, that they don't fund off the cash rate," his briefing paper said.

"However, overall, the weighted average funding cost for a major bank is correlated to the prevailing RBA cash rate. This is because most debt securities and deposit products either automatically adjust or are hedged using interest rate derivatives against adverse interest rate movements."

"I think that this would actually assist borrowers to have greater trust and confidence in rates, which would allow them to think about switching mortgages more easily," said Mr Medcraft.

"They wouldn't be confused between movements in the margin and movements in the standard variable rate as they are today. Comparability would not be an issue."

In The Age and Sydney Morning Herald

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Tracker mortgages. How banks could be made to do their job

Our biggest banks could be forgiven for thinking they've survived the worst. Coached within an inch of their lives by crisis management teams, their chiefs batted off 12 hours of questions before the parliament's economics committee this week without too much apparent damage.

But the committee is yet to report. When it does, there's a chance it'll recommend something every bit as frightening to the banks as a royal commission. It's called a "tracker mortgage" and it would force them to work for their money rather than take it. It would give the rest of us the same rights in our dealings with banks as we have in our dealings with just about with everyone else. Who else other than banks can change the price of what we've bought after we've bought it?

Energy companies can't. They sign us up to contracts that offer a fixed percentage off a regulated price. During the term of the contract the price can change, but only in accordance with changes in the regulated price. Nor can builders, painters, dentists and all manner of other service providers. They charge what we've contracted to pay, whether they end up liking it or not.

Kevin Davis, research director at the Australian Centre for Financial Studies, points out that bank executives are paid handsomely for managing risk, but that in Australia they are able to pass most of that risk onto their customers. "A bank which is funding housing loans in a way which subsequently becomes relatively expensive can simply increase the rate it charges to existing borrowers," he writes in a submission to a Senate inquiry. "A bank which had its credit rating downgraded and faced higher funding costs could pass that onto both existing and new borrowers, rather than it impinging directly on shareholder profits".

It can't happen in the United States, Japan, Korea, Canada, or most of the countries with which we usually like to compare ourselves. There the banks contract to charge a fixed amount over an indicator rate for the term of the contract. Visitors from those countries find our completely variable rates "amazing". Davis says he is not sure why we are unusual. He says it could be because our contract evolved before the 1980s when rates were subject to a government cap. When the cap was removed "the characteristics of the mortgage contract were not reviewed".

He wants the government to prohibit loan contracts "which give lenders absolute discretion to change the interest rate on existing loans". It wouldn't mean tying mortgage rates to the Reserve Bank's cash rate. It would have to be a rate more relevant to their predictable funding costs such as the 180 day bank bill rate. Or the banks could offer fixed rates as they do already. The Greens agree, and the questions asked in this week's hearing suggest other members of parliament are warming to the idea.

It'd salvage something lasting out of what to the banks has been an exercise in PR.

In The Age and Sydney Morning Herald

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GDP Weak. Rate cut looms

An unprecedented further cut in interest rates to levels never seen before in Australia is now virtually certain as the national economy sputters with dwindling growth and disposable incomes slipping backwards.

Slower than expected growth of just 2.7 per cent for the year, outlined in the September quarter national accounts, immediately prompted Treasurer Joe Hockey to reassure Australians he would not order harsh new cuts in the forthcoming Mid-Year Economic and Fiscal Outlook nor in his second budget in May, admitting it would harm the economy and risk further falls in jobs growth and incomes.

"If we have revenue falls due to external factors we should not chase them down," he said. "New cuts to the budget would slow the Australian economy."

Outgoing Treasury Secretary Martin Parkinson said the figures were "a serious warning to us as a nation that unless we tackle structural reform, including fixing our fundamental budget problem, we will not be able to guarantee rising income and living standards for Australians."

The bleak outlook is both economically and politically complex for the Abbott government.

While it had been pursuing an austerity agenda, the risk of harming anaemic growth could now force a fiscal re-think delaying the 2017-18 time-table back to surplus, and a winding in or abandoning of cuts it has been unable to achieve anyway through a hostile Senate.

Mr Hockey told reporters his preference was for a good Christmas with high levels of spending...

With the government now desperate to underpin at-risk business and consumer confidence, Mr Hockey also promised 2015 would be better than 2014 and that 2016 would be better again.

"We want Christmas to be good for Australia, we want Australians to go out there and spend - not just for Santa Claus but for Australia, because increasing household consumption is good for the economy and that in turn will help create jobs for other Australians."

Yet with people's disposable incomes now stuck in negative territory for two successive quarters, there are concerns that to some, the situation will already feel like a recession, sending spending further down.

Australia's economy grew just 0.3 per cent in the first three months of the financial year, a low hit only once before in the past three years. The weak growth rates of 0.5 and 0.3 per cent in the June and September quarters follow much stronger growth rates of 0.8 and 1 per cent in previous two quarters. They suggest economic growth is weakening quickly, a prospect that alarms the Bank.

The central bank's board next meets on February 3. A cut in its cash rate from its present long-term low of 2.50 per cent to 2.25 per cent would take the typical discounted home loan rate below 5 per cent to 4.85 per cent, the lowest since 1970. It would slice a further $51 dollars off the monthly cost of servicing a $350,000 home loan.

The accounts show national income fell for the second successive quarter, slipping 0.4 per cent in September after slipping 0.3 per cent in June, enabling Labor's treasury spokesman Chris Bowen to claim Australia was in an "income recession", the first since the global financial crisis in 2009.

Income per capita shrank 0.8 per cent in September after shrinking 0.8 per cent in June. Household spending was flat after adjusting for inflation as consumers saved more in order to make up for lower real incomes.

On the release of the national accounts the Australian dollar dropped about half a cent to 83.92 US cents, the first time it has been below 84 US cents in four years. Betting on the futures market raised the implied probability of a rate cut in February from 13 per cent to 22 per cent.

Budget revenues are driven by nominal gross domestic product, unadjusted for inflation. It slipped 0.1 per cent in the quarter, indicating that budget revenues will be revised down further when the mid-year budget update is released in two weeks.

The government claims that Labor has blocked $28 billion of savings by blocking budget measures in the Senate.

Mr Hockey said although there would be few if any spending cuts in the budget update he would stick with his strategy of getting spending under control, removing red tape, and granting billions of dollars to the states to build roads.

"We expect the states to help us roll out this new productive infrastructure as quickly as possible," he said. "This will support growth and jobs in the short and medium term and lift our nation's productivity."

The accounts show the construction industry going backwards, subtracting 0.2 points from economic growth in the quarter. Financial and insurance services was the best performing industry, adding 0.2 points to economic growth.

NSW is the best performing state economy in terms of spending, boasting an increase of 1.3 per cent in the past three months. Spending in Victoria slumped 1.6 per cent.

In The Age and Sydney Morning Herald

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Half true. Governor worried, rates not at emergency lows

"Remember the Reserve Bank said that 3 per cent or the Government said that 3 per cent was emergency levels. So, if the Reserve Bank keeps cutting beyond that, understand this - it's because they're worried about the Australian economy."

Joe Hockey, August 5, 2013

Once our politicians boasted about “keeping interest rates low”. In 2004 the former prime minister John Howard campaigned from a lectern emblazoned with those words. Even on Tuesday shadow treasurer Joe Hockey promised that on average, interest rates would always be lower under the Coalition.

But he said on Monday that if the Reserve Bank did cut, it was “because the economy is deteriorating”.

The statement about the cash rate we are checking is this one: "The government said that 3 per cent was emergency levels. So if the Reserve Bank keeps cutting beyond that, understand this - it's because they are worried about the Australian economy."

Supporting evidence

Joe Hockey says that during the 2009 global financial crisis the cash rate was 3 per cent. The Treasurer Wayne Swan said at the time rates were at “emergency levels”. The cash rate is now much lower, at 2.5 per cent.

Does it stack up?

Reserve Bank governor Glenn Stevens doesn’t think he faces an emergency. He told a parliamentary committee in February his cash rate was near 2009 levels “not because we face an emergency like we did back then, but because we face some other forces of a more slowly evolving nature.”

And he explained in two speeches last year that he targets retail rates, not the cash rate.

As he put it: “They are the rates that matter, they are the rates that do the work in the economy, and we are trying to calibrate what we do to get what we think are the right levels for those.”

In his estimation retail rates are 1.5 percentage points higher than they used to be relative to the cash rate. So he has to cut the cash rate further.

In his words: “The normal level of the cash rate is lower than it otherwise would have been, a 3 per cent cash rate today is not the same as a 3 per cent cash rate in the past.”

Joe Hockey is right to say Governor Stevens is cutting rates because he is worried about the economy. But he is wrong to suggest the rates he is targeting are yet at emergency lows.

Finding

Politifact rates the claim “half true”.

In Politifact and The Sydney Morning Herald

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Related Posts

. Memories. Keeping interest rates low

. July. Inflation is too low. Stand by for a pre-election rate cut

. June. Why the Reserve is prepared to cut again

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What'll be inside the budget. Pain, and yet another attempt at a surplus

Whether that's wise or not

Good news will be scarce on budget night, but there will be something - at least for smokers.

Wayne Swan and Penny Wong had been considering a further 25 per cent rise in the tobacco excise that would have raised an extra $1.25 billion a year. Recommended by their National Preventative Health Taskforce it would have pushed the price of a pack of 30s above $20. But the government that famously took on big tobacco late last year in a war over plain packaging got cold feet. In the leadup to the budget it decided it had offended smokers enough, some of whom might still vote for it.

That means there won’t be another run of the infamous headline: “Beer up, Cigs up,” in part because the government has also rejected a plea from the Foundation for Alcohol Research and Education for a flat tax on alcohol that would have raised an extra $1.5 billion per year.

Just about everything that is in the budget will hurt, except perhaps for the lower interest rates that will almost inevitably flow from a raft of unpopular decisions.

Rates

A decade ago John Howard launched a reelection campaign from a lectern that read “Keeping Interest Rates Low”. He won, despite starting behind in the polls.

“Keeping interest rates low” is about the only slogan left for Swan and Wong as they try to sell Tuesday night’s budget. There will be no money for handouts (in fact they are grabbing money back) and they won’t be able to promise a surplus, at least not until the final year of their four-year set of financial projections.

But they will be able to promise a set of conditions that will as good as guarantee a further rate cut and perhaps a series of further cuts well into the life of the next government.

The banks will most likely get into the act themselves by cutting off their own bat, just as they did shortly after the last Coalition government was elected in 1996. They did it then not because they liked the change of government (although they probably did) but because upstart competitors such as Aussie Home Loans were stealing their customers by offering cheaper deals. The global financial crisis removed Aussie and its ilk (it is now owned by the Commonwealth Bank) but the conditions are ripe for new competitors to attack the banks again. The Reserve Bank believes they are charging more than they need to. As soon as a competitor comes in with something better, they will cut in order to compete without waiting for the Reserve. As a sign this is getting close on Friday the ANZ cut its standard mortgage rate by 0.27 points, more than the Reserve Bank’s 0.25 point cut. That hasn’t happened in years.

The Reserve Bank itself believes the resource investment boom is about to peak. “Once it has passed, the decline in mining investment – and the effect of the still high level of the exchange rate and ongoing fiscal consolidation – will weigh on economic growth,” its assistant governor Christopher Kent said recently.

The Reserve is desperate to find something, anything that will take the place of resource investment in driving growth and providing jobs. The high dollar has been making it hard for non-mining businesses to take up the slack.

That’s where “ongoing fiscal consolidation” comes in. It’s code for budget cuts. Dr Kent says it will “weigh on economic growth.”

The Bank has only one lever to boost the economy when something weighs on economic growth and it’s ready to use it.

That’ll be even further good news for the one-third of Australian households with mortgages. When Labor came to power the typical standard variable mortgage rate was 8.30 per cent. It’s now 6.20 per cent making a householder on a $300,000 mortgage an extraordinary $456 per month better off. Two more interest rate cuts in the months ahead would push the total gain well north of $500 per month.

It’s not the easiest of ways to sell a budget full of pain but Swan and Wong will try.

The levy

Never in living memory has a government gone into an election flourishing a bipartisan agreement to lift a tax. Tuesday’s budget will lift the Medicare levy from 1.5 per cent to 2 per cent of income from July 2014 with the grudging support of the opposition. The National Disability Insurance Scheme was to have been funded out of higher general tax revenues, but they are increasing nowhere near as fast as they would need to.

The increase will raise $3.3 billion per year, nowhere near enough to fund the $6 billion or more the scheme will cost the Commonwealth, and possibly a good deal more over time, but it’s a start.

It’ll cost an Australian on an average income an extra $250 per year, but only from mid-next year.

The missing FTB boost

From mid this year the government had been planning to boost the Family Tax Benefit Part A by up to $300 for families with one child and $600 for families with two or more. It was to be part of a $3.6 billion“Spreading the Benefits of the Boom” package funded by the mining tax.

It will be be withdrawn now that it is clear the mining tax isn’t raising anything like what was expected...

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The government is hoping the 1.5 million families the withdrawal will hurt don’t miss what they never quite got, but they will be left with less to spend than they otherwise would have, a prospect that led Myer boss Bernie Brookes to dub the proposed hike in the Medicare levy “not good for our customers,” an epithet for which he later apologised.

But this measure will hit his customers one year earlier.

The missing tax cut

The carbon tax might have hurt, but many Australians were handsomely compensated. From or before July 2012 pensions were boosted, income tax was cut, family tax benefits and the tax-free threshold were lifted and extra payments were directed to low-income Australians.

A bit extra was due in 2015 to when the tax-free threshold was to climb further to compensate Australians for an expected increase in the price of carbon as the scheme linked to Europe’s

But European carbon price has collapsed. Instead of the expected $29 a tonne it is now less than $5, meaning there is unlikely to be an increase to compensate Australians for.

We’ll miss out on the extra $1.59 a week from 2015. But in return the carbon component of our electricity prices will fall.

And the Coalition wasn’t going to give it to us anyway. It has promised to scrap the carbon price and all of the compensation that isn’t set in stone within months of taking office.

More cuts

It won’t be enough. Swan and Wong will need to cut still further to make room for the National Disability Insurance Scheme and Gonski education reforms and contain the deficit. Not all of the unpleasant news is out there.

We do know about a tightening of so-called thin capitalisation rules will limit the ability of multinationals to borrow in Australia to in order to make more lightly taxed profits overseas. It’ll net Swan and Wong a bit over a billion per year.

The baby bonus and the child care rebate may also be back for another trim. A year ago Mr Swan announced that second and third children would only attract a bonus of $3000, instead of $5000. Complaints quickly died down despite the opposition's unfortunate reference to China's one-child policy.

Also in the gun are the generosity of Medicare and the Medicare Safety Net, and the public service which is certain to be slugged with another “efficiency dividend”.

The changes already announced to Superannuation were and the government says it will go no further. It is also giving every sign it will keep the Schoolkids Bonus although logic would suggest it should go because it was partly funded by the mining tax, and the Coalition plans to remove it anyway.

An ever-receding surplus

A year ago Wayne Swan rose to his feet declaring “the four years of surpluses I announce tonight are a powerful endorsement of the strength of our economy, resilience of our people, and success of our policies”.

He won’t be saying that this year. The money’s not there. Whether it hurts the economy or not we are about to pay the price.

In today's Canberra Times, Sun Herald and Age


BUDGET 2013

Swan’s vanishing surplus. How he’ll share the pain:

From mid 2013

A planned boost to Family Tax Benefit A axed. A family earning up to up to $78,000 with two children under 12 would lose $600.

From mid 2014

An extra Medicare levy lifting the total from 1.5% to 2%. An Australian on $50,000 would pay an extra $250.

From mid 2015

A planned boost to the tax free-threshold axed. It was to have been worth $83 for incomes up to $65,000.

Also at risk

. Tax rules for multinationals

. Access to the Medicare Safety Net

. Access to the Baby Bonus

. A public service “efficiency dividend”

Wayne Swan will deliver his sixth budget at 7.30 pm Tuesday night



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Memories. Keeping interest rates low

When Howard left office the average standard variable mortgage rate was 8.30%

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The stubbornly high Aussie. Why the RBA cut and will cut again

Deep concern about the high Australian dollar drove the Reserve Bank to cut its cash rate to the lowest level on record Tuesday, a cut quickly passed on by all but one of the big banks.

The board acted without waiting to know what was in next week’s budget after being told that the mining investment boom might have peaked and there was insufficient activity elsewhere in the economy to take its place. Information supplied to the Bank by mining companies suggested the peak “may well be upon us.”

Instead of sliding with minerals prices as would have been expected, the Australian dollar has remained high during a year in the price of Australia’s resource exports has slipped 9 per cent.

Denied the chance to become more internationally competitive, non-mining businesses have failed to invest as the Reserve Bank wanted. The Bank has also found that mortgage holders banked most of its two most recent rate cuts by boosting repayments rather than borrowing more.

The cut in the cash rate from 3 to 2.75 per cent takes it below what the government dubbed the “emergency levels” it fell to during the global financial crisis. The rate is lowest since the bank began publishing its cash rate at the start of the 1990s. An older series of records suggests it is the lowest since 1959 - when Elvis Presley was in the US army, John Lennon and Paul McCartney had not yet named their band The Beatles and Robert Menzies had just started his record run as Australia’s prime minister.

Financial markets expect further records to tumble. Futures trading late Wednesday predicted another cut of 0.25 points within three months.

Treasurer Wayne Swan rejected as “grossly inaccurate” the suggestion rates were now at lower than emergency levels.

Wider margins mean the rates charged to bank customers are still well above those that prevailed during the 2008-09 crisis.

The standard variable mortgage rate hit a low of 5.75 per cent during the crisis. Even after Tuesday’s cut the lowest standard bank rate will be 6.13 per cent, offered by the National Australia Bank within minutes of the Reserve Bank’s cut in full.

The only big bank not to pass on the 0.25 per cent cut in full was the ANZ whose rate committee meets on Friday.

The cut will slice a further $47 from the monthly cost of servicing a $300,000 loan, taking the monthly saving since 2007 to $456...

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Shadow Treasurer Joe Hockey said it would only be good news for the economy if it kick-started credit growth.

“This has been undertaken by the Reserve Bank not because the economy is doing well but because the economy is not doing well,” he said.

“The Bank has taken this leadership position because the budget is in chaos and the government is not providing leadership.”

Governor Glenn Stevens highlighted the stubbornly high Australian dollar in a statement accompanying the cut saying it had been “little changed at a historically high level over the past 18 months, which is unusual given the decline in export prices and interest rates during that time”.

Demand for credit remained “relatively subdued”.

The Bank will watch closely official data on business investment, wholesale prices and employment during the next month as well as assessing the impact of the budget before deciding what to do next.

In today's Sydney Morning Herald and Age


Standard rates this morning

NAB: 6.13% (down 0.25 points)

Commonwealth: 6.15% (down 0.25 points)

Westpac: 6.26% (down 0.25 points)

Bank of Queensland: 6.26% (down 0.25 points)

ANZ: 6.40% (rate committee meets Friday)

Bendigo Bank 6.51% (under consideration)


MORTGAGE SAVING PER MONTH

$20,000 $3

$40,000 $6

$60,000 $9

$80,000 $12

$100,000 $16

$150,000 $23

$200,000 $31

$250,000 $39

$300,000 $47

$350,000 $54

$400,000 $62

$450,000 $70

$500,000 $78

$600,000 $93

$700,000 $109

$800,000 $124

$900,000 $140

$1,000,000 $155

Assumes 25 year 6.20% variable mortgage


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Rates steady Tuesday. Here's why:

The Reserve Bank board is set to take a breather Tuesday after slicing almost $2000 from the annual cost of servicing a typical mortgage over the past year.

At their first meeting this year board members will be told they can afford to wait longer before assessing the impact of their two most recent cuts in October and December.

Those cuts sliced a further $75 from the monthly cost of repaying a $300,000 mortgage, and would have sliced off $94 had the banks fully passed them on. Over the past year the Reserve Bank cuts that have been passed on took $161 off the monthly cost of servicing a typical mortgage.

The Bank’s cash rate is now just 3 per cent - the lowest on record. The Bank believes any proposals for cuts from here on require a stronger and stronger justification as they would take the cash rate further and further away from normal.

Overseas developments in the two months since the board’s last meeting provide no such justification. The United States has survived negotiations over its so-called “fiscal cliff” and is on track to successfully navigate negotiations over its debt ceiling. British economic growth has turned negative, but no more so than expected. China’s outlook is improving, and Japan has new government keen to restart economic growth.

If sustained the latest boost in the iron ore price will help rather than harm the Australian economy. But the Reserve Bank expects it to fade and sees no signs of mining companies bringing forward or restarting stalled projects. It expects the Queensland floods to have only a minor impact on coal exports.

At home it sees tentative signs consumer confidence is lifting... House prices are climbing again, but slowly. Although the unemployment rate is climbing, the increase is modest. The high dollar is weighing on business confidence.

The latest inflation figures give the Bank plenty of room to act. Notwithstanding the introduction of the carbon tax Australia’s official rate of inflation has slipped to an unusually low 2.2 per cent, well below the centre of the Bank’s 2 to 3 per cent target band. But in the absence of new bad news from overseas or a deterioration in the Australian economy it can’t see a reason to act.

The Bank stands ready to cut rates again as soon as conditions worsen or developments such a further increase in the Australian dollar threaten Australian businesses, but it is prepared to wait until it sees the evidence.

The Coalition Sunday held out the prospect of prolonged economic uncertainty saying it would not release its costed election policies until August, ten days into the campaign for the September 14 election.

The declaration, by shadow assistant treasurer Mathias Cormann appeared to constrain a promise by opposition leader Tony Abbott to “release our costings after the government releases theirs, after the Budget and before polling day”.

Senator Cormann told Sky News the Coalition would wait until the Treasury released its pre-election fiscal outlook ten days into the official campaign.

“There is nothing unusual about that,” he said. “It will be in good time before the next election, after we know what the true position of the budget is based on advice from the treasury secretary and not Wayne Swan who hasn't got a very good track record. We will stick to our timetable, we will not be distracted.”

In today's Sydney Morning Herald and Age


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Ultralow. Could next year's cash rate be 2 per cent?

Sharply weaker mining conditions, a “tepid” recovery in the non-mining economy and a collapse in job advertising have prompted the ANZ to forecast four more interest rate cuts next year - enough to the take the Reserve Bank cash rate from 3 to 2 per cent.

The new rate - almost certainly the lowest in a century - would mean ultra low rates for depositors who are already earning just 1.7 per cent on cash management accounts, 3.05 per cent on online accounts and 0.5 per cent on building society and credit union accounts.

For mortgage holders now paying the discounted variable rate of 6.65 per cent it would mean a further saving of $182 per month on payments on a $300,000 loan. If the banks passed on only 80 per cent of the cuts as has been their recent practice the saving would be $145 per month.

The ANZ had previously been forecasting one or at most two more rate cuts in the year ahead. The bank’s head of Australian research Ivan Colhoun said he now expected four cuts because the non mining economy was failing to pick up fast enough to fill the “hole” that would be left by mining.

“The economy has grown below trend in each of the past two quarters,” he said. “Real net disposable income fell in the September quarter. The key issue is whether the weakest sectors of the economy - retail, housing, manufacturing and non-mining investment - will strengthen sufficiently to offset the anticipated slowing in mining investment. The Reserve Bank’s two most recent interest rate cuts suggest it wants further insurance.”

Mr Colhoun said business conditions were their weakest since the global financial crisis. Forward orders weakened sharply in November and capacity utilisation fell to its lowest since mid 2009.

“Each of these trends, if maintained, warns of slower economic growth ahead and of the need for further policy stimulus to avoid a further rise in unemployment. This will likely require a further 0.50 to 1.00 of rate cuts in 2013 - with the bigger figure likely if the Australian dollar remains high or rises further"...

Reserve Bank deputy governor Philip Lowe said in a speech last week the average level of interest rates would most likely be lower for longer than in the past due to changed global conditions and the decision of Australian households to save an unusually large 10 per cent of their income.

Further cuts would make saving less attractive and borrowing still easier.

The Bank cut its cash rate from 4.25 per cent to 3 per cent during 2012. Standard variable mortgage rates slid from 7.30 to 6.45 per cent. The Bank board is not due to meet again until February.

Treasurer Wayne Swan adopted a hard line with state treasurers at a summit Monday, failing to agree to any requests for extra money. But he supported in principle their request to impose the goods and services tax to imported parcels worth $500, instead of the present $1000 as at present. Officials will develop a business case for the change.

In today's Sydney Morning Herald and Age


ANZ December Chartbook



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Free advice for the ANZ: Eviscerate your competition

This Friday

Here’s some free advice for the ANZ. Eviscerate your competition when you meet to set mortgage rates Friday. Make their Christmas hell.

The National Australia Bank is extraordinarily vulnerable.

Positioning itself as the consumer’s friend, it has guaranteed to offer the lowest standard variable mortgage rate of the big four all year.

But it went out on a limb on Wednesday passing on only 0.20 points of the Reserve Bank’s 0.25 point cut, doubtless expecting the other banks to follow. Westpac and the Commonwealth did.

But the ANZ sets rates on a different cycle, considering such questions only on the second Friday of each month, giving it time to think.

It has the opportunity to break from the pack (a bit) by cutting 0.22 points.

NAB would be blindsided. The cut would take the ANZ rate to 6.38 per cent, exactly the same as NAB’s.

In order to fulfil the terms of its pledge to offer the lowest rate NAB would have to cut again, embarrassing itself by implicitly admitting it sold its customers short last week.

The ANZ would steal the mantle of innovator from the NAB, gain much needed mortgage customers and put beyond doubt that at least one of the banks was prepared to compete on price.

Importantly the opportunity is a once-off. The NAB’s pledge expires at the end of this year. It’s made itself a soft target for one month only. If I was running the ANZ I would take aim.

In today's Sydney Morning Herald and Age

Memo item

Westpac from 6.71% to 6.51%
Commonwealth from 6.60% to 6.40%
NAB from 6.58% to 6.38%
ANZ from 6.60% to...



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Reserve: The big four can pass it on, and if we have to we'll cut again

Me on ABC 891, December 5, 2012

11 minutes, play or CLICK THEN CLICK AGAIN to download mp3

Australia’s big four banks are in a excellent position to pass on all of its latest 0.25 point rate cut, Reserve Bank calculations show.

Each of the big four sat on its hands Tuesday rather than immediately respond as they once used to, leaving it the smaller Bank of Queensland, which passed on 0.20 points and ING Direct, which passed on all 0.25 points.

The prime minister, treasurer and shadow treasurer Joe Hockey all implored the banks to pass on the cut in full, Mr Hockey qualifying his appeal by saying that if they did not cut in full they should give their customers a complete explanation of the reasons why.

The Reserve Bank calculations show the banks in a better cost position than they were in October when the Commonwealth, ANZ and National Australia banks passed on only 0.20 points of its 0.25 point cut and Westpac only 0.18 points.

Reserve Bank governor Glenn Stevens said in a statement released with the rates decision that Australian banks had “no difficulty accessing funding, including on an unsecured basis”.

Treasurer Wayne Swan said while ING Direct had done the right thing by its customers, the other banks had not.

Prime Minister Gillard said with Christmas approaching the big four “should take into account that Australian families will be looking to them to pass the interest rate reduction on in full”.

If fully passed on the cut would slice a further $47 from the monthly cost of servicing a $300,000 mortgage, bringing the total saving since the cuts began last November to $270 per month.

The Bank board cut rates because of signs the business investment outlook is weakening, not only in mining but also in the non mining economy... It pays close attention to the National Australia Bank survey of business confidence which shows business conditions their weakest in three years. It wants to strengthen other parts of the economy in order to take up the slack as the mining investment boom passes.

If necessary it will cut rates again in order to sustain economic growth, restrained only by its inflation target. Late Tuesday the futures market assigned a 67 per cent probability to a further cut of 0.25 points at the board’s next meeting in February.

The board does not believe it has cut rates to “emergency levels”.

Mr Hockey said Tuesday the Bank was “trying to catch a falling Australian economy. It had “dropped rates to emergency levels, not because the economy is doing well but because it is facing huge challenges”.

The cut from 3.25 per cent to 3.00 per cent brings the Bank’s cash rate to the low point reached at the trough of the 2009 global financial crisis.

But unlike during the financial crisis it has not been brought there by a series of dramatic, unprecedentedly large cuts. Unlike during the global financial crisis it has not be accompanied by a dramatic boost in government spending. Unlike during the financial crisis it has not been accompanied by an unusally low Australian dollar but by a near-record high dollar.

“Anybody who would go out there and describe rates now in the same context that they were at the height of the global financial crisis is simply unqualified for high office,” Mr Swan said.

“We are having an attempt to sensationalise this rate cut, not just by the Liberal opposition, but elements of the media. Anyone who can't welcome a cut as such good news for families and business is somebody who is just being negative about everything.”

In today's Canberra Times, Sydney Morning Herald and Age


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Why the Bank should cut today, why the market thinks it will

The Reserve Bank is considered certain to cut interest rates after a last-minute deluge of data showed spending had stalled, profits had collapsed, the job market had shrunk and inflation had turned negative.

“Interest rate cuts come in groups,” said Bank of America Merrill Lynch chief economist Saul Eslake. “Like cockroaches, there’s hardly ever just one.”

“The Reserve Bank cut in October, it held off in November, and now it knows it needs to do more. If it doesn’t move Tuesday it will have wait two months until its next scheduled meeting in February.”

Retail spending stopped growing in October. The Bureau of Statistics says minimal growth in NSW and a dive of 0.5 per cent in Victoria were offset by continuing strong growth in Western Australia. The national growth rate of zero is significant because it came after a rate cut intended to spur spending. Spending on items other than food slid 0.7 per cent.

“It is clear the economy is in effect treading water,”said CommSec economist Savanth Sebastian. “Consumers are holding back on significant purchases. Lower pricing will have to play a part in enticing nonplussed consumers.”

The monthly TD Securities inflation gauge shows prices slid 0.1 per cent in November, suggesting the December quarter consumer price index will rise a mere 0.2 per cent, allowing ample scope for the Bank to cut again.

The ANZ job advertisements index slid a further 2.9 per cent in November, its eighth consecutive fall. Job advertisements are down 17 per cent since February.

Total wages and salaries paid by businesses actually fell in the September quarter for the first time since the global financial crisis.

Company profits slid 2.9 per cent... Mining profits slumped 12.2 per cent, offset by a rebound in manufacturing profits of 10.8 per cent. Small business profits slipped 2 per cent.

Inventories Inventories grew for the fourth straight quarter, climbing a further 1.1 per cent as businesses found themselves unable to move as much stock as they had expected.

“The Reserve Bank’s underlying objective is to ensure a smooth batton change from growth led by mining to growth led by something else," said Mr Eslake. "It looks as if mining investment will peak lower and sooner than had been thought. The Bank is running out of time to foster faster growth elsewhere.”

The budget cuts announced in October have added to pressure on the bank to boost economic growth.

The Australian Industry Group’s performance of manufacturing index slipped a further 1.6 points to 43.6 in November on a scale where anything less than 50 means the sector is shrinking.

The RP Data measure of national housing prices held firm in November after slipping 1 per cent in October, suggesting the October rate cut did little to spur the market.

Late Monday the interest rate futures market assigned a 92 per cent probability to a rate cut Tuesday, up from 83 per cent earlier in the day.

The bookmaker sportingbet.com.au would pay out only $1.22 on a $1 bet for on rate cut, compared to $3.25 for $1 bet on no change.

“It’s around what we would pay on Black Caviar winning its next race,” said spokesman Haydn Lane. “It’s about as close as you get to a certainty.”

The Australian dollar fell almost a third of a cent to 104.06 US cents Monday on the expectation of a rate cut Tuesday. Treasurer Wayne Swan welcomed the prospect of a rate cut saying it if happened a family with a $300,000 mortgage will be saving around $5,000 per year compared to when the Coalition was last in office.

In today's Canberra Times, Sydney Morning Herald and Age


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5676.0 8501.0

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Expect two more rate cuts, starting now - OECD

Neat interactive graph:

The Reserve Bank is set to cut interest rates two more times - once in December and once near the start of next year - taking its cash rate to 2.75 per cent, a new all-time low.

The new forecast from the Organisation for Economic Co-operation and Development has the cash rate staying at the new floor until halfway through 2014. If fully passed on the cuts would bring the standard variable mortgage rate to near 6 per cent, slicing a further $90 from the monthly cost of servicing a $300,000 mortgage.

The OECD credits budget cuts with its forecast of two further rate cuts, saying the government’s determination to achieve a surplus will “dampen demand”, forcing the Reserve Bank to act to shore up the economy.

It says the Bank will be able to act in December because inflation is “contained”, an achievement reached “despite the introduction of a carbon tax in July”.

The OECD forecast of rate cuts exceeds that of the market. Interest rate futures contracts assign only a 55 per cent probability to a rate cut next month. The OECD draws up its forecasts after consulting closely with the Treasury and Reserve Bank. The Treasury has a representative stationed at the OECD headquarters in Paris.

The OECD’s economic forecasts are broadly consistent with those in the Treasurer’s mid-year budget update. It expects Australia’s economy to grow by 3.7 per cent this year, 3 per cent in 2013 and 3.2 per cent in 2014.

It has downgraded its forecasts for global growth to 3.4 per cent in 2013 and 4.2 per cent in 2014, most of which will be driven by China and other emerging economies. The biggest risks to the outlook come from the so-called euro zone which should be in or near recession until well into next year and the possibility of a “fiscal cliff” in the United States when scores of tax cuts and spending measures expire at the end of this year.

The report paints a picture of an uneven economy with mining investment expected to “expand vigorously in 2013 on the basis of announced plans” while job creation slows, unemployment hovers at around 5.5 per cent, and the rest of the business climate is “challenging, particularly in construction”...

The Australian dollar has remained higher than would be expected in the face of lower export prices, holding back exporting and import-competing businesses.

The government’s determination to return the budget to surplus has held back the economy, although not by as much as “would first appear”. Much of the apparent turnaround is the result of shifting spending between financial years and “changes in the accounting treatment of unclaimed financial assets” as well as cuts in defence spending and foreign aid which will have a “limited impact on domestic demand.”

Should economic conditions deteriorate significantly the OCED says the government should delay its planned return to surplus, advice also offered by the International Monetary Fund in its report on Australia earlier this year.

Treasurer Wayne Swan welcomed the forecasts saying since last November official interest rates had been cut five times bringing mortgage rates well below the 8.5 per cent that applied when the government changed hands.

“A family on a $300,000 standard variable mortgage is saving around $4500 a year in repayments compared to what the Liberals saddled them with when they left office,” he said.

In today's Canberra Times, Sydney Morning Herald and Age

Australia OECD November 2012



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