Mother of the economic gods (if there are any). Bill Evans, my hero of the past couple of days, has just trashed himself with one of the great weathervane moments in interest rate commentary. Following this morning’s RBA minutes, the Westpac Chief Economist has released the following note:
Reserve Bank of Australia Board meeting minutes – Board puts big emphasis on next CPI release while recognising that the urgency to hike rates has been reduced.
The Reserve Bank Board minutes have emphasised just how important the near term inflation position is for the Board. While it was indicated that the recent data had suggested there was more time available to assess inflationary pressures an even stronger than anticipated emphasis has been given to the June quarter CPI outcome. While we think that this outcome is unlikely to cause a rate hike it appears that the Board will be prepared to move if the number is very high.
It may be that the data deterioration since the Board meeting makes the hurdle higher for a policy response than indicated in these minutes but we cannot dismiss this clear signal emphasising the importance of the release on July 27.
Contrary to our assessment of the likely outlook for global growth, the Bank maintains its view that, consistent with the IMF, growth will be at or above average in both 2011 and 2012 although it was recognised that downside risks had increased.
On the domestic economy there is no real change to recent assessments with the cautious household sector and soft housing market being noted. A rise in mortgage arrears over recent months was mentioned and falling house prices in Western Australian and Queensland were noted.
While the outlook for investment continued to be very strong it is recognised to be being driven by the mining sector with investment in the non-mining sector remaining soft.
Consistent with the Governor’s statement on July 5 it appears that the Bank has lowered its growth forecast for 2011 mainly due to the weather-related disruptions to coal production and more significantly recognition of the impact that the cautiousness of the household sector is having on growth.
Conclusion
It is difficult to assess whether there has been a movement towards a neutral bias. On the one hand, with a lower growth forecast the Board noted that it had more time to assess inflationary pressures but on the other hand a very clear emphasis is being given to the CPI report for the June quarter which is set to be released on July 27. Our forecast for underlying inflation is 0.7%qtr which we do not believe will be sufficient to generate a hike and we would go as far as to say that there is unlikely to be a realistic number that could result in that policy response. Nevertheless we can’t ignore the very clear signal from these minutes that this number will be critical.
I’m a bit staggered by this. One set of largely dovish minutes from a period prior to the dramatic deterioration in the European crisis (the breakout in Italian and Spanish bond spreads) and Bill has flipped.
What was last week’s analysis and call about then?
This looks like the scourge of economics to me. A infectious inability to ever be wrong. Why is this so hard? Make a call. Explain your reasoning. If you’re right, good. If you’re wrong, also good, as long as you explain why.
