Why the markets meltdown isn't spooking the RBA into cutting rates | The Business | ABC News
Summary
TLDRGlobal markets experienced a sharp selloff due to fears of a US recession and rising interest rates in Japan. The Dow Jones fell over a thousand points, and the NASDAQ saw its worst days in more than two years. The Reserve Bank of Australia (RBA) held rates steady at 4.35%, despite market expectations for cuts. The RBA predicts unemployment to rise and inflation to take longer to reach target, with some economists and banks forecasting a rate cut by early next year. Investors are concerned about the potential for more economic risks, while households face increased cost of living pressures.
Takeaways
- 📉 Global markets experienced a significant selloff, with the Dow Jones Industrial Average down over a thousand points.
- 😟 The NASDAQ suffered its worst Sweet Days in more than two years, indicating a deep downturn in the tech-heavy index.
- 😨 Concerns over a potential US recession and rising interest rates in Japan have unsettled investors worldwide.
- 🇦🇺 The Reserve Bank of Australia (RBA) decided to keep rates on hold at 4.35%, despite market expectations for a cut.
- 💡 RBA Governor believes the economy has settled down and cautions against alarm, suggesting a need for calm and patience.
- 🚫 Inflation in Australia is not falling as quickly as desired, leaving the RBA with limited options other than holding rates.
- 🤔 The RBA now forecasts a longer timeline to achieve the midpoint of their inflation target by the end of 2026, instead of the middle of 2026.
- 📈 The RBA sees the economy operating beyond its capacity, suggesting that interest rate cuts are not imminent.
- 🏦 Some Australian banks and money markets are forecasting an interest rate cut by early next year, despite the RBA's stance.
- 🏠 Rising interest rates have increased the cost of living for Australians, impacting mortgage repayments and home ownership aspirations.
- 🗝️ The Bank of Japan's decision to raise interest rates has had a ripple effect on global markets, particularly in Asia.
Q & A
What was the main cause of the global market selloff mentioned in the script?
-The global market selloff was intensified by fears of a US recession, rising interest rates in Japan, and the panic reverberating back to Australia.
How did the Reserve Bank of Australia (RBA) respond to the market situation?
-The RBA decided to leave rates on hold at 4.35% and did not alarm the Governor, who suggested having a little bit of caution and calm.
What was the RBA's stance on inflation and interest rate cuts?
-The RBA warned that inflation wasn't falling fast enough, leaving the board with limited options and suggesting that interest rate cuts were not imminent.
What was the RBA's expectation regarding unemployment and inflation?
-The RBA now expects unemployment to rise sooner than expected and it will take longer to get underlying inflation back to target, pushing the midpoint of the target to the end of 2026.
How did the Australian banks and money market react to the RBA's decision?
-Despite the RBA Governor ruling out a rate cut this year, two of Australia's biggest banks are forecasting a rate cut by Christmas, with the money market expecting one by February.
What impact has the rise in interest rates had on households like Stacy Gleon's?
-Stacy Gleon's mortgage repayments have skyrocketed from around 1,300 to 2,000 per month, making her dream of moving closer to her family unattainable.
What factors contributed to the sharp fall in the Japanese equity markets?
-The sharp fall was due to the Bank of Japan raising interest rates, leading to an unwinding of the Japanese carry trade and a surge in the Japanese Yen.
Why did the Bank of Japan decide to raise interest rates?
-The Bank of Japan had valid reasons to start lifting interest rates as the Japanese economy was doing better, and inflation was running around the target.
What was the market's reaction to the Bank of Japan's rate hike?
-The market reacted with a significant sell-off, with Japanese share markets experiencing their worst session in decades.
What is the relationship between markets and central banks, according to Shane Oliver?
-Markets and central banks have a to-and-fro relationship where markets often run ahead, central banks raise rates to cool them down, and then markets fall, prompting central banks to cut rates.
What does Shane Oliver believe about the RBA's decision to hold interest rates steady?
-Shane Oliver believes the RBA was a bit too hawkish and should have been more concerned about the US economic situation and its potential impact on Australia.
When does Shane Oliver expect the RBA to start cutting interest rates?
-Shane Oliver expects the RBA to start cutting interest rates within the next six months, with a base case for a cut in February.
Outlines
📉 Global Market Turmoil and Recession Fears
The script opens with a report on the Dow Jones Industrial Average plummeting over a thousand points amid a global selloff, triggered by fears of a US recession. Investors are anxious due to rising interest rates in Japan, which has had a domino effect on markets worldwide, including Australia. Despite the Reserve Bank of Australia (RBA) Governor's reassurances of stability, the central bank maintains rates at 4.35%, causing concern for Australians already struggling with the cost of living. The RBA's decision to hold rates reflects its limited options due to insufficiently declining inflation. The bank's outlook includes a delay in achieving the inflation target and an expected rise in unemployment. Market expectations for interest rate cuts are deemed premature by the RBA, which does not foresee a recession. However, there is a divergence in opinions, with some banks and economists predicting rate cuts by early next year. The script also touches on the personal impact of rising mortgage repayments on Australians and the broader economic implications of the RBA's stance on interest rates.
🌐 Impact of Japanese Monetary Policy on Global Markets
This paragraph delves into the complex interplay between economic fundamentals, investor behavior, and central bank policies, particularly focusing on the recent turbulence in the Japanese and global markets. The Bank of Japan's decision to raise interest rates has led to a significant sell-off in Japanese equities and a ripple effect across Asia, including the ASX. The script discusses the potential mistiming of the rate hike by the Bank of Japan, which coincided with growing jitters from Wall Street, contributing to a 'mini quake' in investment markets. While the bank has signaled its readiness to raise rates further, it is now expected to adopt a more cautious and gradual approach. The narrative also explores the dynamic relationship between markets and central banks, highlighting how markets can lead economic cycles and how central banks respond to market movements. The conversation concludes with a critique of the Reserve Bank of Australia's decision to hold rates steady, suggesting that it may have been too hawkish given the US economic risks and the potential for a recession that could impact Australia.
Mindmap
Keywords
💡Dow Jones Industrial Average (Dow)
💡Global selloff
💡NASDAQ
💡US recession
💡Interest rates
💡Reserve Bank of Australia (RBA)
💡Inflation
💡Unemployment
💡Market volatility
💡Yen carry trade
💡Investment strategy
Highlights
Dow Jones Industrial Average falls over a thousand points amid global selloff.
NASDAQ experiences the worst Sweet Days in more than 2 years.
Global markets tumble due to fears of a US recession.
Rising interest rates in Japan cause panic, affecting markets including Australia.
RBA Governor states that the situation has settled somewhat, calling for caution and calm.
Reserve Bank of Australia leaves rates on hold at 4.35%.
Inflation in Australia not falling fast enough, limiting the board's options.
Market expectations for interest rate cuts may be ahead of themselves, according to the RBA.
RBA does not believe a recession is imminent.
Unemployment in Australia expected to rise sooner than anticipated.
RBA revises expectations for achieving the midpoint of the inflation target to the end of 2026.
Economy has been operating beyond capacity more than previously estimated.
Two of Australia's largest banks forecast a rate cut by Christmas.
Money market expects a rate cut by February.
Some economists predict no RBA rate cut until May of next year.
Stacy Gleon's mortgage repayments have increased significantly due to rising interest rates.
RBA still concerned about potential upside risk to the economy.
Investors start betting on a chance of an RBA rate cut after market volatility.
Shane Oliver discusses market movements and the relationship between markets and central banks.
Oliver suggests the RBA may have been too hawkish and expects a rate cut within the next six months.
Transcripts
we begin with breaking news on Wall
Street after a tumultuous day for
markets across the globe the Dow's down
more than a thousand points as that
Global selloff intensifies we're looking
at the worst Sweet Days in the NASDAQ in
more than 2 years Global markets tumbled
over fears of a US recession investors
unsettled by Rising interest rates in
Japan the Panic reverberating back to
Australia but it didn't alarm the RBA
Governor we're watching very closely I
think things have settled down a bit
today I think we just need to have a
little bit of caution and a little bit
of calm The Reserve Bank left rates on
hold at
4.35% Australians are doing it tough
enough already uh the last thing they
needed today was more cost of living
pressure but Michelle bulock warned
inflation wasn't falling fast enough
leaving the board with limited options
there were only two things on the
table hold
and hold accepting that we might have to
hold for some time or raise the markets
are saying rates should be lower have
the markets got it right and uh is a
recession on the way what I'm trying to
tell the markets today is that I think
they probably expectations for interest
rate cuts are a little bit ahead of
themselves are we heading for recession
I don't believe so and the board doesn't
believe so often times we see that share
markets can actually lead the rest of
the economy and when you have big Falls
and shares that can actually mean that
you are going into
recession the RBA now expects
unemployment to rise sooner than
expected and it will take longer to get
underlying inflation back to Target they
now expect that we will get to the
midpoint of the Target by the end of
2026 previously it was the middle of
2026 we're seeing from the RBA today
that the economy has been operating
Beyond its capacity even more so than
they previously estimated and we think
that interest rate cuts are not going to
be arriving in short
order despite the RBA Governor ruling
out a rate cut this year two of
Australia's biggest banks are
forecasting a rate cut by Christmas with
the money market expecting one by
February some economists think
households will need to wait even longer
so we're not expecting a cut from the
RBA until May of next year I think
another six months we will see more
weakness in many parts of the economy
and lower inflation which will give them
the green light to cover
rates and that couldn't come soon enough
for Stacy gleon who's seen her
repayments Skyrocket preco I was looking
at around 1,300 for mortgage payments
per month these days it's more like
2,000 so pretty big step she had been
hoping to move to a suburb closer to her
family but that's now not possible
bought here 9 years ago in Logan Lee and
have been thinking about upgrading last
couple of years but obviously things
changed with interest rates Rising um
and yeah just kind of became more of a
dream than a reality a dream on hold for
now with the RBA still concerned about
the potential for more upside risk to
the economy investors could be forgiven
for wondering why after yesterday's Wild
Ride on the markets some Traders started
betting on a chance the RBA would
deliver a rate cut this afternoon to
clarify the dramatic Market movements of
recent days and to discuss whether more
Market volatility is likely I spoke to
's head of investment strategy and
economics Shane Oliver welcome why was
the sentiment on the ASX so different
today compared to yesterday look I think
there were a couple of reasons firstly
yesterday's sharp fall of 3.7% had
largely anticipated a big fall on Wall
Street Wall Street perhaps didn't fall
as much as feared a and consequently um
share markets this local share market
had a bit of a rebound it doesn't mean
we're out of the woods um markets don't
go in straight lines it's just that
there wasn't any more bad news uh
hitting us from from internationally
what exactly did happen yesterday were
investors fears about the likelihood of
a US recession or the unwinding of the
Yen carry trade or frothy markets over
overhyped on AI Justified look I think
those concerns were Justified we were we
were vulnerable to a correction a
pullback at some point in time uh the US
economy is at risk of going into
recession unemployment has been rising
there so that is a valid concern by the
same token share markets had had had
very strong gains that had pushed
valuations to extremes and of course
that all got combined late last week
with the bank of Japan raising interest
rates running the risk that investors
say well I was boring in Japan at zero
now I'm going to have to pay interest on
that maybe I should take my money back
to Japan so an unwinding of Japanese
carry trade so there was a bunch of
factors here driving the the turbulence
we've seen partly economic fundamentals
partly also the positioning of investors
unwinding their their speculative bets
you mentioned the bank of Japan is that
why Japan's Equity markets had their
worst session in decades yesterday and
why markets in Asia the ASX included
were the worst hit on the global cell I
have a feeling that what went on in
Japan exaggerated the sell-off in our
region yesterday uh the Japanese share
market had gone to record highs it was
doing spectacularly well suddenly we see
the bank of Japan get a lot more hawkish
and uh that of course uh then led to
investors thinking well maybe we better
buy Japanese Yen the Japanese Yen surged
share markets globally started to get
the Jitters which just re reinforced
that upwards Trend in the Japanese Yen
which then blew back to the Japanese
share market and pushed it down 12% or
so in one day for a 25% fall from its
recent highs that of course then also
affected our local share market and
probably exaggerated the size of the
falls we saw and so did the bank of
Japan get its timing wrong when it
decided last week to lift interest rates
look I think the bank of Japan had a
valid reason to start lifting interest
rates uh they have been coming from
close to zero we have seen the Japanese
economy doing a lot better inflation is
running around Target so it made sense
to move but they didn't realize they
didn't know that just around the corner
uh was some Jitters coming out of Wall
Street so I think the two things
combined to give us this this sort of
mini Quake we saw going through
investment markets but I don't think you
blame the bank of Japan for that they
weren to know uh what was about to
happen in the next couple of days the
bank of Japan has signaled it is
prepared to raise rates again do you
think now it will be waiting for the US
F fed to cut first I think the boj will
wait a little bit longer here given
what's happened the sharp fall in the
Japanese share market is warning them
they need to be a little bit cautious in
not moving too quickly so I think
they'll go back to a somewhat more
gradualist approach going forward yes we
probably will see another tightening by
the bank of Japan but it's probably
going to be a smaller one and it's
probably going to be several months away
before they move is there a valid
question to be asked about the
relationship between markets and central
banks and who is leading who
look I think there's always been a bit
of a uh to and fro between markets and
central banks uh markets often tend to
run ahead of themselves central banks
then start to raise interest rates to
slow down economies and cool down
investment markets which then creates
Falls in investment markets but you
don't want markets to come down too much
so then central banks have to cut in and
start cutting interest rates so I think
both are Central to the business cycle
and the investment cycle and it's very
hard to see a way which uh removes that
linkage so I think the reality we're
seeing here is is just the way markets
work and we're always going to see that
as long as we have free investment
markets are there lessons from what
we've seen for Australia the RBA decided
to hold interest rates steady but admits
it did discuss hiking them was that the
right call look to be honest with you I
think the Reserve Bank was probably ling
a little bit too hawkish I was surprised
that they weren't a little bit more
concerned about what's going on in the
US yes some of the volatility we've seen
in investment markets was just due to
positioning speculative moves but a big
chunk of it is actually due to economic
fundamentals and the reality here is
that there is a high risk of recession
in the US that will have an impact on
Australia the other thing I guess that
you can't ignore about the US is that
just like in Australia they've been
seeing a big decline in job vacancies
that's now bleeding through to higher
unemployment we've also been seeing a
big fall in job vacancies here the
likelihood is that that will also sh up
in much higher unemployment than the
Reserve Bank is allowing for so I I must
admit I was a little bit surprised at
the hawkishness uh coming from The
Reserve Bank today when do you expect
the RBA to move off
4.35% like to be honest with you when
the you see the rba's commentary today
it looks like it's a long way away it's
not consistent with their current
thinking but I suspect that they will be
forced to start cutting interest rates
at least in the next 6 months so our
base case is for a cut in February but
there is a very high chance that that
will start to occur earlier mainly
because of weaker economic data both
internationally and also in Australia
Shane Oliver thank you my pleasure thank
you
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