A bullhawk macrobated?

Well…probably not. But spare a thought for HSBC’s Paul Bloxham, who, having predicted an August rate rise all year, and only pushed out his predicted timeline for a hike a week or more ago, suddenly finds his fellow bullhawks (Joye and Carr) taking to the higher atmospheres, screetching for an August move.

This morning he is out with a note confirming his view that August RBA meeting will not see a rise and his reasoning for why is rather resonant with the views expressed at this site, if a little less detailed.

Inflation is still the focus
As we have been saying for some time now, the medium-term case for higher interest rates remains in tact. This week’s CPI provided further evidence supporting that case. The Q2 CPI data showed that the pulse of inflation is on a solid rising trend, with the RBA’s two preferred underlying measures above the target band in quarterly terms for two consecutive quarters (around 3.6% annualised in H1) (Chart 1).

But this is history. The key question for a forward-looking inflation targeting central bank is: how do these numbers and other recent events change the inflation forecasts? And, there are currently forces pulling the CPI forecasts in both directions. On the downside are: the lower domestic GDP forecasts (due to weak coal exports in Q1); weaker domestic sentiment; a weaker non-mining sector; a stronger AUD; and, a weaker world economy. On the upside: the starting point for the CPI is higher than expected; and, the underlying momentum in inflation is building.

On balance, we think the RBA will leave their forecasts unchanged, with underlying CPI to get to the top of the band (3.0%) by end-2011, stay around that level through 2012, and rise above it in 2013.

The case for rate rises is solid. In a normal state of the world, this would be enough to motivate a hike. But the world is currently full of tail risks. And, as the RBA Governor is fond of saying, monetary policy is set with the principle of ‘least regret’ in mind. We think the ‘least regret’ approach implies steady policy next week, to let the smoke clear.

What smoke? Two main things: to determine if recent weaker domestic business and consumer sentiment is temporary or something that genuinely impacts economic activity; and, to allow some of the global risks to resolve. Indeed, the looming deadline to lift the US debt ceiling is, inconveniently, only a few hours after the RBA makes it cash rate announcement, but a few hours before a policy change would be implemented the next morning. Lifting rates in that window may be risky if things don’t go so well in the US.

We think they hold next week, but stay ready to pounce. We expect a hike in Q4.

Welcome aboard, Paul. I think.

Houses and Holes
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  1. I think he’s half right. The RBA will hold off because there are too many global risks at the moment and the patchy local economy. Not sure about the Q4 hike though.

  2. I think RBA likes surprises – they cannot resist seeing our faces 🙂
    They will hike!

  3. Blox said this…”What smoke? Two main things: to determine if recent weaker domestic business and consumer sentiment is temporary or something that genuinely impacts economic activity; and, to allow some of the global risks to resolve.”

    If that is what the RBA are waiting for before they hike, then Steve Keen is right and the next move for rates will be down.

    Global risks wont be “resolved” – they will be pushed down the road a little longer. Consumers are drowing in debt and higher prices – nothing will change that in the foreseeable future.

    So that smoke wont clear…its a deep fog that aint going nowhere!

  4. I still say hold for now, with next move down in ~6 months.

    RBA is, IMHO, smiling slightly, as things, broadly, seem to be going to “plan” – particularly, i am referring, to disleveraging, slow (currently) reducing house prices, and (apparently) increasing wages (for some!) –> all good for housing affordability.

    ie. where things are at seem to them, IMHO, to be just about right.

    I think they will look-through the current supply-side high-ish inflation and just HOLD.

    My 2c

    • Which is a timely reminder that the reality is things are not that bad. This seems to escape most people. We are not Ireland nor Greece. A deterioration may occur but preferably there will be a longish period of stabilisation and adjustment. An RBA balancing act requiring a virtuoso performance on their part.

      • ceteris paribus

        I agree. For the economy as a whole, as distinct from those individuals caught in the squeeze, the measured windback in house prices, in the accummulation of housing and personal debt etc. is a good place to be.

        The central question, however, is whether the windback will stay measured or whether it is a tipping point for something far more “interesting”. Patience. Time alone will tell.

        • “The central question, however, is whether the windback will stay measured or whether it is a tipping point for something far more “interesting”. Patience. Time alone will tell.”

          You’re absolutely right that this is the key question. People who talk about how this is a soft landing and that the RBA is managing the decline well seem to forget what has happened in other countries where the bubbles have already burst.

          Prices didn’t drop 20% overnight – they flattened, then dropped slowly, often rose a little, and then dropped more, sometimes a bit more sharply but generally not at a massive pace.

          Who knows whether we are yet at the start of an extended decline or not, though there are definitely some signs that we may be (e.g. slowing finance growth, increased inventory on the market, lower sales, falling prices).

          I’m in the Steve Keen camp of 40% declines over 10-15 years. That could happen with prices simply flatling for an extended period of time, but I’ve never seen a bubble deflate like that.

      • I’ll clarify my own position, for posterity’s sake…

        I was mainly talking about the RBA’s perception of things – I don’t necessarily agree.

        IMHO, we still have a housing-based economy – yes, IMHO, much bigger than what is or even will be Resources.

        Hence, even small “adjustments” (and even improvements to affordability) to housing, will have non-linear repercussions for the economy.

        I mean, we a have a housing economy, and that is slowly unwinding; and this is the kind of “creative destruction” the Austrians like to talk about. The economy is re-aligning, and that is “painful” – AND, resources are simply not large enough compared to the behemoth that is housing, and it’s structural significance to our economy.

        Housing breeds services, too; so housing is also structural to our service-based economy.

        Will we transition to be a real “Quarry Australia”. Probably.

        Will it occur without significant pullback and pain? Not IMHO. Housing (and ripples) is >> Resources (and ripples).

        Hence a sniffle in housing (and associated) can wipe out a Resources boom – and I contend that it is: we have negative real growth and declining real per-capita GDP figures already, don’t we?

        Many say, “where is the boom” – and it’s probably happening, but housing-related declines are nullifying it.

        And that’s all just a mechanical perspective…if the weird dynamics of shifting sentiment really compound upon one-another, and shift our mechano-centric descriptive paradigms (which I think they will), then we’re in for more of a ride.

        /end rant


        • Emphasises the importance of the boom and its continuation. We’d be up a certain creek without it.

          • Would we necessarily be up the creek without the mining boom though?

            Let’s imagine that we didn’t have a mining boon – government revenues would be down as would economic activity in the resource states.

            But the RBA would be far less hawkish, our dollar would be much lower and hence our manufacturing and tourism industries would be much healthier, and we would have politicians and opinion-makers more focused on the dire straits of our domestic economy rather than the “just around the corner” Future Boom.

            I’m not convinced one way or the other so please feel free to persuade me.

          • In a recent RBA paper they said there is in fact no such thing as Dutch Disease – I’m not agreeing nor disagreeing with that. Global forces are causing the AUD to rise to record levels. Credit boom has ended. Property asset growth stalled. What else can we have and what else can we do?

          • H&H aka Imperial Leader

            I humbly advise like SOME of your suggestions. Some should be discarded with the morning ablutions.

  5. With the recent volatility in ‘money’ market yields Joye & Carr could have egg on their faces as soon as tomorrow.

    I refer you back to my recent post regarding the collapse in the rules of money & chaotic behaviour.

  6. AB – you call is similar to Lorax’s and my first response is OK, take what you present as a given, and consider the impact of high oil/petrol costs with a low AUD. This would permeate throughout the economy and add to inflationary pressures.

    Our levels of indebtedness would remain the same, flows of funds to overseas creditors would remain the same – there would be no rebalancing in terms of inflow of funds (via the mining boom – Treasury estimated $100 billion windfall to government coffers by 2012), end of the credit boom would still result in falling consumer confidence, retailers feeling the pinch, AUD impacted exporters would be doing better, possibly – all dependent on the extent of decline of global demand and that is probably true to some extent for tourism, Qld would still have flooded, manufacturing per se has long been in deline about to be exacerbated by the carbon tax, we’d still be facing the carbon tax and congestion tax, utilities would still be increasing charges and so on. Falling government revenues could result in reduction of government services and a long slow spiral downwards would ensue.

    Whilst benefits of the boom may not be directly experienced by all, they do exist in a larger macro way – certainly enough for government, Treasury and RBA to want to engineer its continuation. External global factors are beyond our control.

    My 2c.

    • Yeah, OK that’s pretty convincing.

      On a slightly different not, if we’re looking at oil prices being inflationary when our dollar drops, what happens if/when our housing bubble pops.

      RBA lowers rates which drops the dollar, which increases oil prices which adds to inflation pressures.

      I guess the end result depends on whether the deflationary effects of asset price drops outweigh the inflationary aspects of a currency drop. Interesting times indeed.

      • What utter drivel Fanboy.

        Please describe a scenario where the AUD falls significantly but commodity prices — including oil — don’t. If the AUD crashes, oil will crash with it, just like it did in 2008-09, when (IIRC) petrol prices actually fell significantly.

        I see you’ve added the non-existent congestion tax now to your list of bogeyman taxes. Manufacturing is being smashed because of a 30% appreciation in the AUD in matter of months, not because of taxes that are a) yet to be implemented, b) timid and over-compensated, and c) don’t exist.

        Mr Holes outlined a perfectly rational set of policies to alleviate our problems earlier today. You don’t like it because it dares give all Australians a share of what is rightfully theirs, and spreads the wealth in a way that is simply not happening at the moment.

        AB: Don’t give into his nonsense.