Stevens slashes rate cut hopes, underpinning Aussie: While the language towards the currency is an escalation of jawboning seen earlier in the year, by stripping out the prospect of rate cuts early next year, something his interview has done, it will actually act as positive for the Aussie until the rhetoric from himself and the RBA Board changes. As for the best way to foster confidence I disagree with the Governor that it's to provide a message of 'stability and predictably'. From my experience this year it is job security that is holding confidence back, something that is partially due to non-mining sectors of the economy being hollowed out by the high AUD and overly-tight monetary policy settings over the past few years. I may well be wrong, certainly it sounds like it given his words overnight, but I'm still happy to call interest rates lower it the first half of 2015. (VIEW LINK)
Unemployment is the key to the consumer sentiment. I think if the currency stays above 80 cents in early 2015, we will get a cut. On the flip side if the currency falls below 80 cents then we will not get a rate cut. Retail will struggle even if you cut rates and the currency is 75 or below. If a few retailers start rolling over, then you start adding to the unemployment line and there will be a cabinet switch.
The best form of AUD jawboning Stevens could have done overnight was not do the interview. The reality is that unemployment is at a 12-year high and people are concerned about job security given the deterioration in the economy. In my view RBA are making the same mistake as they did in 2011, keeping policy too tight for too long. Stability in interest rates is nothing compared to knowing you're getting a reliable pay check when it comes to building confidence.
Stevens has a dig a politicians, and rightly so in my opinion. However, despite warning them of the need for an adult discussion on the economy, the RBA should be more concerned on the odds of that actually occurring. Unfortunately they're not high, and in my book that means that they will have to do more of the heavy lifting. With consumption a large component of GDP, unemployment growing and consumer sentiment so low, something will have to give.
There was certainly some pretty strong language in that interview and some good counter arguments (in my view) against a further rate cuts. Stevens' point about job losses not being dramatic, whilst a little insensitive, does probably stand true when you look at the experience of some of the EU nations. It certainly doesn't suggest a rate cut is a forgone conclusion... The AFR interview is a good read. http://www.afr.com/p/national/glenn_stevens_interview_the_full_FiihZ41I8IrOls4Yh6D8wK