The Distillery: Rates friction

The interest rate ruminations of the Reserve Bank of Australia, through the release of its monthly board meeting minutes, drew plenty of attention from the commentariat. According to one scribe, the next rate move is definitely down, but another isn’t so sure. If the market wants to chase record highs, it may need to do so without any further assistance from the central bank.

The Australian Financial Review’s markets columnist, Philip Baker, takes the latter viewpoint, looking to traders for guidance.

“While there are still a few economists out there who think there will be two more rate cuts, bond and interest rate traders aren’t so convinced. There are two meetings before the end of the year and it’s looking unlikely the bank will move then, while there’s no meeting in January, so the next window is February. Traders are betting a cut at that time of one quarter of a percentage point is around a 32 per cent chance, but after that it’s more likely rates will stay where they are or start to rise.”

Fairfax’s Michael Pascoe concurs, noting the “contrast in tone is sharp between the Reserve Bank minutes and those who think the Australian economy is still sliding”. Rate cuts may not be off the table, he adds, but they are unlikely in the next few months.

“There is no easing bias with the stimulus of present low rates yet to be fully felt, but, as always, the bank would be able to cut rates further if the outlook deteriorates. The only thing off the agenda for the foreseeable future is a rate rise. The penguins continue to sit pat.”

The AFR’s David Bassanese, in contrast, takes the view that the easing bias of the Reserve Bank will lead to a cut early next year, likely in February.

“The minutes to the Reserve Bank of Australia’s October policy meeting suggest the bank retains a modest bias to cut interest rates further. While an interest rate cut this side of Christmas appears increasingly unlikely, the bank could still cut rates early next year if the recent lift in business confidence unwinds or fails to translate into a lift in labour hiring and investment intentions across the non-mining sectors of the economy.”

Time will tell who is right.

Meanwhile, the standoff in Washington continues to drag along toward the October 17 debt ceiling D-Day. While the assumption of a last-minute deal lives on, The Australian’s Richard Gluyas queries whether we have now become immune to the grandstanding tactics of the Tea Party. And is that in itself a problem?

“The unnerving thing about Tea Party whackos in the US holding the global economy to ransom is that people are becoming inured to it … Despite dysfunctional Washington politics again taking us to the brink, there is an overwhelming view that, in the end, sanity will always prevail. It's a brave assumption, because it takes a certain kind of madness to get us where we are.”

Fairfax’s Elizabeth Knight, however, explains why that assumption appears to be the right call.

“For weeks now they have been taking a punt that, despite both sides of US politics appearing intractable, a resolution would be reached. As the clock ticks down to the deadline Thursday (US time), this bet looks increasingly likely to pay off.”