Bullhawks vanquished!

After the frighteningly hawkish SoMP and minutes from last month, it appears the RBA has done a straight one-eighty and presented us with an extraordinarily dovish Statement. Let’s pull it apart:

At its meeting today, the Board decided to leave the cash rate unchanged at 4.75 per cent.

The global economy is continuing its expansion, led by very strong growth in the Asian region, though the recent disaster in Japan is having a major impact on Japanese production, and significant effects on production of some manufactured products further afield. Commodity prices have generally softened a little of late, but they remain at very high levels, which is weighing on income and demand in major countries and also pushing up measures of consumer price inflation. In response, a number of the countries with stronger expansions have been moving to tighten their monetary policy settings over recent months. Overall, though, financial conditions for the global economy remain accommodative. Uncertainty over the prospects for resolution of the banking and sovereign debt problems in Europe has increased over the past couple of months, which has been adding to financial market volatility.

Nothing here about the US slowdown but a clear concern with the effects of high input costs, inflation and tightening on major producer countries: read China. Back to the Statement:

Australia’s terms of trade are reaching very high levels and national income has been growing strongly. Private investment is picking up, led by very large capital spending programs in the resources sector, in response to high levels of commodity prices. Outside the resources sector, investment intentions have been revised lower recently. In the household sector thus far, there continues to be a degree of caution in spending and borrowing and a higher rate of saving out of current income. The impetus from earlier Australian Government spending programs is now also abating, as had been intended.

The Futureboom! in mining is now but it appears it is being satisfactorily offset by weakness in other sectors, from both declining capex and a measured consumer. However, there is an implicit warning here for the latter in the use of the phrase “degree of caution in spending”. That is not as confident on consumer saving as the last minutes which simple said “caution in spending”. Back to the Statement:

The floods and cyclones over the summer have reduced output in some key sectors. As a result there was a sharp fall in real GDP in the March quarter, despite a solid increase in aggregate demand. The resumption of coal production in flooded mines is taking longer than initially expected, but production levels are now increasing again and there will be a mild boost to demand from the broader rebuilding efforts as they get under way. Over the medium term, overall growth is likely to be at trend or higher.

We got it wrong but its more or less on track. Back to the Statement:

Growth in employment has moderated over recent months and the unemployment rate has been little changed, near 5 per cent. Most leading indicators suggest that this slower pace of employment growth is likely to continue in the near term. Reports of skills shortages remain confined, at this point, to the resources and related sectors. After the significant decline in 2009, growth in wages has returned to rates seen prior to the downturn.

This is much more confident than last month on employment not growing at inflation-inducing rates. Back to the Statement:

Overall credit growth remains quite modest. Signs have continued to emerge of some greater willingness to lend, and business credit has expanded this year after a period of contraction. Growth in credit to households, on the other hand, has softened, as have housing prices. The exchange rate remains, in real effective terms, close to its highest level in several decades. If sustained, this could be expected to exert continued restraint on the traded sector.

This is pretty bearish sounding to me. We’ve done enough it says. Back to the Statement:

CPI inflation has risen over the past year, reflecting the effects of extreme weather and rises in utilities prices, with lower prices for traded goods providing some offset. The weather-affected prices should fall back later in the year, though substantial rises in utilities prices are still occurring. The Bank expects that, as the temporary price shocks dissipate over the coming quarters, CPI inflation will be close to target over the next 12 months.

At today’s meeting, the Board judged that the current mildly restrictive stance of monetary policy remained appropriate. In future meetings, the Board will continue to assess carefully the evolving outlook for growth and inflation.

Forecasts for inflation on track, nothing to worry about. Gone is the following from May (h/t mb):

Looking through these short-term movements, however, the recent information suggests that the marked decline in underlying inflation from the peak in 2008 has now run its course. While the rising exchange rate will be helping to hold down prices for some consumer products over the coming few quarters, over the longer term inflation can be expected to increase somewhat if economic conditions evolve broadly as expected.

Dovish for the foreseeable future (unless you buy that new telly).

Houses and Holes
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      • Where is the statement:

        “In this respect, members judged that if economic conditions continued to evolve as expected, higher interest rates were likely to be required at some point if inflation was to remain consistent with the medium-term target. Members agreed to continue to assess carefully the evolving outlook for growth and inflation at future meetings.”

        Is that gone? Or will does it appear only in the minutes? Are they playing hide and seek?

        Reading from these statement it sounds like they are firmly on hold for the foreseeable future.

        But if you read last month’s minute they are ready to pull the trigger at any time?

        schizophrenic! Must be all about RBA vs RBA board dynamics!

        Are they now scared because of the share market / house price drop ?
        Or will the minutes tell us they are about to raise again????

        • On hold for the foreseeable future. A delicate balancing act – preserve the mining boom, keep consumer demand low, stifle housing increases, limit inflation. In effect, cause as minimal pain as possible during the Great Transition. If consumers binge – rates up. If consumer behaves, employment holds, steady as she goes.

          • Do you think the minutes will contain this statement like last time:
            “members judged that if economic conditions continued to evolve as expected, higher interest rates were likely to be required at some point if inflation was to remain consistent with the medium-term target” and it’s only dropped from the main monetary statement ? That’s what they have done last time….

      • H&H, I agree. Pretty much signaled intentions to the market via Battellino’s speech. Can’t see rates moving upward unless significant change in current trend status. No move – the correct move.

    • RBA lacks of back-bone and sacrifies prudent people who save to appease the debt-laden mobs. What can you expect ? the same if not worse trend happening in Europe and US.

      The message is just chills, lives and spends like no tomorrow, take 120% mortgage, and max-out all of your 10 credit cards. No worries, your government will bail you out in the end by sacrificing the prudent savers minority.

      The high inflation (and negative real interest in US) is just a hidden tax on people who have savings / investments and a bonus to debt-laden majority mobs.

      • …and yet people are not really taking out all that much debt, esp mortgage debt (as a medium term trend)…

        So, the cheap money is there, yes, but the trending desire is waning…

  1. Sounds like Adam has capitulated…

    SCOREBOARD: Hysteria wins!

    Adam Carr

    So it looks very much like voodoo and hysteria won out on the day. Now the million dollar question is when? Having kept rates steady this month (at 4.75 per cent) when there was a clear cut case to hike, the natural question is what additional information could they possibly need to see to hike? Unfortunately I don’t think we are going to know till we get the minutes (and maybe not even then) but it’s not like there is a lot of data from now till the July 5 meeting – one retail print, approvals and the employment numbers on Thursday are about it for the major indicators.

    The issue that is whether they want to wait for more CPI data or that for whatever reason (eg couldn’t possibly after a negative GDP print) just felt they couldn’t hike today; but were of the view that the data warranted a hike. If it’s the first then they’ll wait till August, but it’s the latter then July is live. Up front, I have no idea. Today’s statement was little changed from last month and there was literally no new information provided. We are pretty much flying blind so its anything goes – the case was already clear cut and reason is out the window, which of course makes it difficult to forecast.

    My initial thoughts are that if they are going to wait till July, then waiting till August is no biggy. They are already behind the curve so it makes little difference – especially and as already mentioned, there isn’t really much data out till then. I’d also note that there is no urgency in this statement to hike in July – no clear signal. So until we see the minutes and at this stage, I think July and August are fairly even bets. Other than that, not a lot else to it.

      • Gotti’s thoughts: A slow RBA dawn

        Thank goodness sanity prevailed in the Reserve Bank boardroom. There is a lot of work to be done to show the Reserve Bank directors just how severe the downturn is in non-mining Australia. This is too important to leave to the Reserve Bank boffins some of whom contributed to the 2008 mistakes.

        Are Adam and Gotti getting along these days?

  2. Imagine what Adam will write when the RBA start cutting interest rates…Can you?

  3. These RBA press releases are just for the punters anyway. i.e. How does the RBA Board want consumer sentiment to change in response? Sounds to me like they want consumers to quit saving so much, just not too much that inflation creeps up.

    But more than that it’s probably more of a concern that business lending contracted in April, as that’s supposed to be the driver of the FutureBoom right? That’ll likely rise again, but they can hardly tighten while businesses aren’t expanding.

      • HnH – So you know the exact amount of spending that an economy needs?

        Also, does it matter what kind of spending? Do they mind if I spend some money on my continuing education? I hope they dont mind…

        Geez…the central planners really have brainwashed you all into thinkig they can push every button at just the right time.

        • Stavros, in HnH’s defense, i think he’s just emulating the RBA sentiment, not necessarily endorsing it with that statement.

          I and agree with the sentiment, but more from this point of view: they don’t exactly know what to think of the future – given their expectations of FutureBoom, but present medium-term trends of disinflation and a deflationary housing whistle in the distance (for them) – so they held. Right move, if you’re a central banker, IMHO.

          My 2c

  4. The essential point in all this is the Board’s assessment of current policy, which it correctly describes as ‘mildly restrictive’, and its view that this ‘remained appropriate.’

    In the aggregate, real demand is growing, real incomes are growing, real investment is growing….But this is not the whole story. There are clearly some obstacles to growth as well. And if inflation is present in the economy, it is not worrisome.

    So why depart from the status quo? There is not enough data to support change. Caution rules.

    • Torchwood1979

      Plus we’ve rewound over two decades as far as the household savings rate goes. Households saving their growing incomes = less need for rate rises. The bullhawks are too focused on the income side of the equation; they aren’t paying enough attention to the cash flowing to the piggy bank unless it’s used to justify the strength of our banks.

  5. The omission from the statement is any mention of housing. The RBA can hardly be ignorant of the slowdown. But it obviously does not want monetary policy to be seen to be aimed at this (or any other) asset class.

    So we can expect further contraction in the property sector and, allied with this, further contraction in associated lending and a gradual deterioration in property related defaults.

    As long as this does not turn into a rout, the RBA will probably think it’s no bad thing. Fundamentally, the deflation of the property sector will be good for Australia’s net external debt, good for future home-buyers and good for household savings. Tough on the banks and their shareholders, but then, they have had a miracle run……

      • You’re right, HnH, it does.

        The statement is a quick summary of the past month’s diary entries. Nothing specific gets too much weight – on the contrary, there are so many factors to muse upon.

        Reading between the lines, maybe the bank is conscious that the terms of trade and the dollar may not stay at their current lofty levels….that the risks are on the downside…

    • Torchwood1979

      This particular quote is priceless:

      “A central bank’s credibility is a preciously fragile thing. In this context, the RBA’s corporate Board members could do with a decent dose of monetary policy Viagra.”

    • Joye, another acarrlyte it would appear, along with MB’s own resident acarrlyte – Carr may be getting more publicity than warranted!

      • ?

        I’d actually love the RBA to cut since I am long USD. Thing is the RBA is contradicting itself in the space of 15 days, since the last minutes.

          • Ah, well it’s not me then… I am actually waiting for a cut.

            However I still think the RBA are being schizophrenic, possibly the result of an economy with split personality.

  6. The way we all watch and predict the cost of money makes me feel ill.

    Is this really what economics has come down to? Dissecting every word spoken by a bunch of unelected morons that didn’t see the GFC coming?

    Maybe it makes people feel good to predict things like rate rises etc…strange that, I would rather be proud of a creative or productive idea…not so much predicting the whims of central banksters

  7. Perhaps a new entry for the glossary is warranted:

    Credibility transfer – the process of reassigning one’s own credibility problem to the RBA.

  8. I remember with some wistfulness those heady days of early 2008, when I was confident Stevens would back his bullish sentiment with a tight-to-tightening bias. Alas, it wasn’t to be. And then house prices went ballistic.

    Lets face it, if commodity markets collapse he will be dropping rates again, and fast. Housing market be damned.