Why the markets meltdown isn't spooking the RBA into cutting rates | The Business | ABC News

Summary

Global 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

00:00

📉 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.

05:00

🌐 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.

Keywords

💡Dow Jones Industrial Average (Dow)

The Dow Jones Industrial Average, often referred to as 'the Dow,' is a stock market index that measures the stock performance of 30 large companies listed on stock exchanges in the United States. In the video, it is mentioned that the Dow is down more than a thousand points, indicating a significant drop in the value of these companies, which is a key indicator of a tumultuous day in the global markets.

💡Global selloff

A global selloff refers to a widespread selling of securities, such as stocks, across various markets around the world. The script describes an intensification of a global selloff, which is a major theme of the video, as it discusses the impact of this selloff on different markets and economies.

💡NASDAQ

NASDAQ is an American stock exchange known for listing technology and biotechnology companies. The script mentions the worst Sweet Days in the NASDAQ in more than 2 years, which signifies a significant and prolonged period of decline in the value of the stocks listed on this exchange, reflecting broader economic concerns.

💡US recession

A recession is a period of negative economic growth that lasts for at least two consecutive quarters. The script raises fears of a US recession, which is a central concern for investors and has a ripple effect on global markets, as the US economy is a significant driver of global economic activity.

💡Interest rates

Interest rates are the cost of borrowing money and are set by central banks. In the script, rising interest rates in Japan unsettle investors, leading to market panic. The script also discusses how interest rates are a tool used by central banks to control inflation and economic growth.

💡Reserve Bank of Australia (RBA)

The Reserve Bank of Australia is the country's central bank, responsible for setting monetary policy, including interest rates. The script mentions the RBA's decision to leave rates on hold at 4.35%, which is a key decision in the context of global economic uncertainty and its impact on the Australian economy.

💡Inflation

Inflation is the rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling. The script discusses how inflation is not falling fast enough, which is a concern for central banks like the RBA, as it affects their monetary policy decisions.

💡Unemployment

Unemployment refers to the number of people in an economy who are willing and able to work but are not currently employed. The script mentions that the RBA now expects unemployment to rise sooner than expected, which is a negative indicator of economic health and can affect consumer spending and overall economic growth.

💡Market volatility

Market volatility refers to the rapid and significant fluctuations in the value of stocks, bonds, or other securities. The script discusses recent market volatility, which is a central theme as it explores the potential causes and implications for investors and the economy.

💡Yen carry trade

The Yen carry trade is a strategy where investors borrow in Japanese Yen at low interest rates and invest in higher-yielding assets elsewhere. The script mentions the unwinding of the Yen carry trade as a factor contributing to market turbulence, as investors move money back to Japan due to changing interest rates.

💡Investment strategy

Investment strategy refers to the approach an investor or financial advisor takes to achieve specific financial goals. The script includes an interview with an expert discussing investment strategy in the context of current market conditions, emphasizing the importance of understanding market dynamics and economic indicators.

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