June not a done deal

On Friday and over the weekend the consensus came down strongly in favour of a June rate rise. Those declaring June the day included Peter Martin, Terry McCrann and Michael Stutchbury (that gives you all the major papers). Amongst bank economists there is Westpac, RBS and ANZ, as well as, of course, the bullhawks, Adam Carr and Chris Joye.

Fundamentally, we at MB acknowledge the RBA’s bias to tighten. In February this year Glenn Stevens made it obvious why when discussing the commodities boom:

…the nominal exchange rate has responded strongly. This helps to offset the expansionary effect of the increase in investment, and also gives price signals to the production sector for labour and capital to shift to the areas of higher return. In other words, firms in the traded sector outside of resources are facing a period of adjustment.

That is, the RBA wants to make room for resources investment and is happy to use interest rates, and by extension the currency, to do it.

However, we at MB have also been much more cognisant than other commentators of the weakness this adjustment is forcing on the housing-driven services economy. For obvious reasons, most others have an interest in an ‘optimistic’ view of housing.

It also became clear last week that the RBA itself has become more focussed on this weakness:

Overall credit growth remains quite modest. Signs have continued to emerge of some greater willingness to lend, and business credit has resumed growth after a period of contraction. Growth in credit to households, on the other hand, has softened recently, as have housing prices in several cities. The exchange rate has risen further and, in real effective terms, is at its highest level in several decades. This, if sustained, could be expected to exert additional restraint on the traded sector.

Beyond the biases, the reasoning of Michael Stutchbury seems to sum up the hawkish position best:

But the Reserve Bank’s quarterly forecasts show underlying inflation rising to 3 per cent by the end of next year as the job market tightens. Critically, they also show underlying inflation breaking through the target to 3.25 per cent by late 2013.

To maintain his low-inflation credibility, Stevens must act now to prevent this from happening.

Late 2013 on both measures. That doesn’t sound like he MUST act now to me. Here’s the graph:

That’s core CPI at 2.5% this time next year. Even if we accept a six month lag for monetary policy, there’s no great urgency. And in my view, rates work more quickly these days on the giant debt pile.

There’s an intense adjustment underway in the Australian economy. In my view the RBA wants the flexibility to be able manage it either if the boom sector accelerates or the weakening sectors get disorderly. The data flow will determine the decision.

David Llewellyn-Smith


  1. Chris Joye’s uber bullhawk mate is calling a wage price spiral and 4% inflation.

    Some weird stuff here:

    The Australian Workers Union’s Paul Howes reminds me a lot of Bob Hawke

    Huh? I can’t think of anyone who reminds me less of Bob Hawke. Hawke had the great gift of being “likeable” (by most people anyway) whereas Paul Howes must be one of the most instantly unlikeable public figures in Australia.

    But this hits the nail on the head…

    We already have full employment — at this point the RBA’s policy is designed to shut down little bits of the economy, so as to make room for the biggest mining boom in 150yrs. The bigger the boom, the more unemployment the RBA has to generate to keep bargaining power at the right level such that inflation sticks around 2.5% per annum.

    • Armand Tamzarian

      Nonsense. We have 4.9% unemployment when you define someone working one hour per week as being employed. The ABS actually lists labour underutlization at 11.9% but to find that number the punditry would have to look beyond the monthly press release.

      • Armand Tamzarian

        Here is the ABS link:


        Scroll down to table 20. Labour underutilzation is higher now than prior to the start of the GFC. Economists claiming full employment exists are either lazy, i.e. not looking beyond the press release, or deliberately misleading.

        …I’m looking at you Adam Carr, Chris Joye, Bill Evans, etc. …go stand in the corner.

      • AND I’ll keep banging the drum on Centrelink moving people from Newstart to DSP and other pensions, when these people are really unemployed. Once they move, participation rate drops and so goes the unemployment rate. Both Labor and Libs have made a line in the sand to get people working, therefore these people will be moved back to Newstart and hense the participation rate will go up and so will the unemployment rate.

  2. Of course they care. That doesn’t mean they won’t pull the trigger. But if housing accelerates downward again this month, they’ll wait, in my view. There’s plenty of unemployment to generate down that path if needed.

    • Agree completely with your line of thinking here, H&H… no central bank could witness what has happened in other countries in the aftermath of large housing booms (in RBA’s parlance, of course a bubble in reality) and not have a very careful eye on it here… even though publicly they need to carry out the pretence that they are not too concerned…

      In any case, if monetary policy does have such a long lag period, then what is the lag period on the wealth effect from house price gains (or falls)??

      I’m certainly not suggesting interest rate cuts to resuscitate the housing market, because a stronger housing market is the last thing they want… but neither do they want a sharply collapsing market (which I think is likely from here, anyhow)…

      I have no doubt that the interest rate decision is far more finely balanced than many are suggesting, and I strongly doubt that there will be rise in the next few months… in fact, I’d go as far as to say that their actions will be limited until it is clear whether the housing market falls are accelerating…

    • I’m not convinced the RBA is listening to what the broader economy is telling them. The bull-hawks are in the ascendency, and Stevens is a true believer in the never ending resources boom.

      Obviously, the broader economy will be much more important to Swan and Gillard, which is what makes this so interesting politically.

  3. David, there is increasing commentary in the media and social media / blogosphere suggesting that Glenn Stevens has been compromised, owing partly to his religious beliefs, but mainly to the fact that his own salary has inflated by 85% over five years while he argues for low wage inflation for everyone else…

    Glenn Stevens pay jumps 13% per annum; No moral authority?

    How do you feel about this? Do you think Stevens may raise interest rates just a little bit too far? The property bubble is already collapsing and the economy is assured of at least one upcoming quarter of negative growth.

    Will interest rates be raised again? Stevens has put himself in a bind!


    • To find the answers look beyond economics.

      “AFTER more than a quarter-century as a professional economist, I have a confession to make: There is a lot I don’t know about the economy. Indeed, the area of economics where I have devoted most of my energy and attention — the ups and downs of the business cycle — is where I find myself most often confronting important questions without obvious answers…”

      -Greg Mankiw
      Professor of Economics, Harvard

      An interesting post where Barry Rithholz responds to Mankiw’s NYT article:

      “Well, Professor Mankiw, you asked. Rather than just give you the answers, I want to start by suggesting you are looking in the wrong places. That wrong place, is the field of economics.

      Let’s put aside the fundamental error of classical economics — that Humans are rational, self-interested, profit maximizing creatures. They are clearly not; Humans are actually irrational social animals with flawed cognitive apparatus. Frequently emotional, occasionally self-destructive, often times erratic, humans only rarely exhibit the traits that economics ascribe to them. If the study of economics begins with such a shaky foundation, is it any wonder they get so much wrong?”

      He reminds readers (and Mankiw):

      “Do not overlook a key underlying issue: The causal factor here is that the public wants certitude, regardless of how erroneous. Study after study has revealed that a “Frequently wrong, never in doubt” commentator is much preferred by the majority of viewers/readers over an intelligent commentator honestly discussing the unknowable future in terms of what is unknown and unknowable.

      Probabilistic nuance versus strongly confident (but wrong)? The public chooses the latter almost every time.”

      Worth a look.

  4. there’s a mistake in the above. the RBA’s forecast for core CPI is 3%y/y from Q2’11 to Q2’13, rising to 3.25%y/y in Dec’13 (probs due to the flat nom AUD assumption meaning fx passthrough stops, plus a little bit of pressure from hitting the economy’s straps).

    you say

    “That’s core CPI at 2.5% this time next year”