11 Jun One Is The Loneliest Number
You could be forgiven if the RBA Governor Philip Lowe after reducing the Overnight Cash Rate last week to 1.25% if he didn’t have the Three Dog Night song rattling around in his head (appropriate name really for the band singing this song, although I remember Johnny Farnham’s version better from when I was just a wee lad) – One Is The Loneliest Number.
One Is The Loneliest Number That You Will Ever Do
Two Can Be As Bad As One
It’s The Loneliest Number Since The Number One
Not only that but a further reduction to either 1% or 0.75% for the cash rate is also not out of the reckoning either over the next 12 months. If you look at the chart below you will see why – you currently get 1.25% for parking cash overnight with the RBA, compared to 1.48% for locking it away in a 10 year Government Bond.
If you believe that our cash rates are low have a look at long term interest rates around the world expressed as 10 Year Government Bond Yields.
| Country | 10 Year Bond Yield |
| USA | 2.15% |
| UK | 0.83% |
| Australia | 1.48% |
| Japan | – 0.12% |
| Germany | – 0.26% |
| Greece | 2.85% |
| Italy | 2.37% |
| South Korea | 1.66% |
| Switzerland | -0.61% |
Yes you are reading right – if you invest in a 10 year government bond in Japan, Germany or Switzerland you get a negative return i.e. you get less of your monies back in 10 years that you started out with. Not only that but the cash rate in Switzerland is – 0.5%, as the Swiss try to keep cash pouring into their economy which causes their currency to rise and making their exports uncompetitive
Why have the RBA cut rates – well the factors they have considered are: –
- Economic Growth
Headline growth rate – The economy only grew 0.3 percent in the September quarter and 0.2 percent in the December quarter. Annualised rate of GDP is currently 1.8%, the lowest since the GFC.
It is noted that quarterly statistics can be a bit “jumpy”. The Headline Growth rate shows the decline in Housing markets in both Melbourne & Sydney (which have come off extreme highs) If you consider that over the last 12 months that because of the drought that the Headline Growth rate has taken a hit. If Farmers have a better season this year you may see a rebound (everything else being equal) in the Headline Rate.
The RBA Governor remarked
The economic outlook remains reasonable, with the main downside risk being the international trade disputes, which have intensified recently. The Australian economy is still expected to strengthen later this year, supported by the low level of interest rates, a pick-up in growth in household disposable income, ongoing investment in infrastructure and a brighter outlook for the resources sector. So today’s decision (4th June to reduce the cash rate) does not reflect a weaker outlook. Rather it reflects the fact that, even with the expected pick-up in growth, the Australian economy is likely to have spare capacity for a while yet.
- Consumer Inflation (CPI)
Income and spending per person fell in the December quarter, following a September quarter where it barely grew. Annual Inflation as measured by the RBA is 1.3% & currently trending lower. The RBA remarked that inflation has been impacted by
Slow growth in wages, increased competition in retailing, the adjustment in the housing market – with rents increasing at the slowest pace in decades – and various government initiatives to reduce the cost of living pressures on households. These factors are all putting downward pressure on prices and they are likely to remain with us for some time yet.
- Unemployment
The latest unemployment figures were a bit over the shop.
Total employment rose 28,400 in April, stronger than the market median estimate of over 15,000. Full-time employment in April fell 6,300 with part-time employment growing 34,700. The big surprise in the April results was the jump in the unemployment rate from 5.1% to 5.2%. This was the result of a jump in the participation rate (the number of people actually looking for work) to a new record high of 65.85%. The RBA Governor remarked
For some years, most estimates of full employment, including our own, equated to an unemployment rate of around 5 per cent – it was thought that if unemployment went below that for too long, inflation would rise and become a problem. But, given the combination of the labour market and inflation outcomes we have seen of late, our judgement now is that we can do better than this – that we can sustain an unemployment rate of 4 point something.
It is also worth noting that the supply side of the labour market is turning out to be more flexible than we had earlier expected. The recent evidence is that when jobs are there, more people join the labour force and other Australians stay in work longer. Reflecting this, the participation rate is currently at a record high, despite demographic shifts that we anticipated would reduce participation. It is also the case that people are prepared to work extra hours when there is strong demand for their labour. Together, these observations support the conclusion that there is still spare capacity in the labour market and this is likely to remain the case for a while yet. The recent data have given us more confidence in this assessment and we have responded to this.