The agony of the bullhawks

As the bullhawks (Joye & Carr) withdraw to their high eyries, dragging the bloodied corpse of Terry McCrann with them, they should take a moment to raise their razor sharp beaks a few points above the strictures of yesterday’s war. Strict adherence to an inflation band is sensibly modified by an appreciation of imminent risks, whether that is the immediate danger of a Western recession, so apparent in global PMIs, or it’s the home grown vulnerability of a lurching housing bubble.  

That is what the RBA has done and until the bullhawks do so to, they will continue to be wrong.

So, let’s take a look at Glenn Stevens’ statement and see if we can’t give the bullhawks a few pointers:

Statement by Glenn Stevens, Governor: Monetary Policy Decision

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, but the pace of growth slowed in the June quarter. The supply-chain disruptions from the Japanese earthquake and the dampening effects of high commodity prices on income and spending in major countries both contributed to the slowing. It is still not clear how persistent this slower growth will be. The supply-chain disruptions are now gradually abating and commodity prices have softened of late, though they generally remain high. In China most indications suggest only a mild slowdown so far.

The central scenario for the world economy over the next couple of years envisaged by most forecasters remains one of growth below the pace of 2010, but at or above long-term averages. Downside risks have increased, however, as concerns have grown over the outlook for the public finances of both Europe and the United States.

Australia’s terms of trade are now at very high levels and national income has been growing strongly. Investment in the resources sector is picking up very strongly and some related service sectors are enjoying better than average conditions. But in other sectors, cautious behaviour by households and the high level of the exchange rate are having a noticeable dampening effect. The impetus from earlier Australian Government spending programs is now also abating, as had been intended.

The resumption of coal production continues, but a full recovery of flood-affected production now looks unlikely before early next year. Precautionary behaviour by households also looks likely to keep some areas of demand weaker in the near term than earlier expected. Overall, growth in real GDP through 2011 is now likely to be at about trend. Over the medium term, overall growth is still likely to be at trend or higher, unless the world economy deteriorates noticeably.

So, the RBA’s central tendency remains a bias to tightnen on the medium term outlook. Fair enough. I wonder, however, how we are going to see a return to trend growth and above. Like Deus forex Machina, I believe the consumer has hunkered down permanently so demand will remain subdued. Ironically, in part, because the the RBA has been so effective in communicating its medium term bias to tighten (something we can perhaps thank the bullhawks for). Back to the Statement: 

Growth in employment has moderated and the unemployment rate has been little changed, near 5 per cent, for some time now. 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, though productivity growth remains weak.

Year-ended CPI inflation has been high, affected by the extreme weather events earlier in the year. As these effects reverse over the next couple of quarters, CPI inflation should decline. But measures that give a better indication of the trend in inflation have begun to rise over the past six months, after declining for the previous two years. While they have, to date, remained consistent with the 2–3 per cent target on a year-ended basis, the Board remains concerned about the medium-term outlook for inflation.

So, the current inflationary pulse is the result of the floods. But, and this is correct in my view, there’s now a more broad-based underpinning to the shift in prices. Back to the Statement:

It is appropriate under such circumstances for monetary policy to exert a degree of restraint. Most financial indicators suggest that it has been doing so, as a result of the Board’s decisions last year. Credit growth has declined over recent months and is very subdued by historical standards, even with evidence of greater willingness to lend. Most asset prices, including housing prices, have also softened over recent months. The exchange rate is high. Each of these variables is affected by other factors as well, but together they point to financial conditions being tighter than normal.

Self explanatory, ‘we’ve done enough for now and we’re aware that disleveraging is in full roar’. Back to the Statement:

At today’s meeting, the Board considered whether the recent information warranted further policy tightening. On balance, the Board judged that it was prudent to maintain the current setting of monetary policy, particularly in view of the acute sense of uncertainty in global financial markets over recent weeks. In future meetings, the Board will continue to assess carefully the evolving outlook for growth and inflation.

In short, lookout if we get clear air from Europe and the US. Which, in my view, we won’t.

Bill Evans is alive and kicking

Houses and Holes
Latest posts by Houses and Holes (see all)


  1. RBA doesn’t mention the the important things, like Bernanke’s war on deflation, US govt’s policy to weaken the USD, Germany creating a German-run European Ministry of Finance, gold price signalling the demise of the major fiat currencies…

    • But why is the “global uncertainty” likely to be deflationary and therefore a justification to keep rates on hold when inflation called for a rate rise…if they think the economies of the world are tanking, then they shouldn’t use opaque statements about uncertainty.

      Its their way of keeping rates on hold, without noting how wrong they were at the beginning of year 2011

      • Sorry to clarify what I meant…there is only passing reference to the high levels of debt that Australian mortgage holders are carrying (actually is there any mention of mortgage debt??)

        So he blames natural disasters and global uncertainty as a cover for the real problem…the world is drowing in debt and so rates dont need to rise as delveraging will take of the recent spike in deflation.

        I just get so tired of reading his statements when the justification for their decision is not really what is concerning them.

        Its all about housing credit growth…they know what is coming, but dont have the integrity to admit it and to admit that they stuffed up in letting debt levels climb so quickly

      • But Ben, its not political…the level of housing debt, the risk this poses to financial stavbility in Oz and past RBA rate policy is exactly the kind of things they should be talking about.

        Failure to address these issues (they dont have to make political judgements abotu fiscal policies etc…) is a cop out.

  2. The problem with the analysis of McCrann et al, is that they are stuck in the early 1980’s and genuinely think a price/wage spiral is just around the corner. They can’t see that inflation doesn’t mean what it once did. When policy rates in core countries are more or less at 0%, any uptick in inflation won’t feed into inflation expectations because there’s a lack of demand globally. In that kind of environment, the only way inflation can damage economic growth is if the central bank takes their inflation target literally and overeacts. Reading Stevens’ speech the other day, it seems as though the RBA may be waking up to this fact.

      • Exactly… If they could see that the post-2007 world has a deflationary bias, they would understand that infation slightly above target isn’t threatening and is probably a positive (and is definitely a positive when the saving rate is historically high as it is here).

    • +1

      We have food and gasoline generated inflation (which is not impacted by rates), and unemployment stuck at 5%.

      All other data is at GFC levels, and people are expecting the RBA to hike???

      It’s interesting to note that they actually considered it: “At today’s meeting, the Board considered whether the recent information warranted further policy tightening. On balance, the Board judged that it was prudent to maintain the current setting of monetary policy…”

  3. I love it
    I can’t wait to read the Carr/Joye response
    Those guys must’ve been seriously long in the interest rates/betting markets to be so hawkish

    • BK, do you like the way Joye always hedges his bets just before. Last week before the CPI numbers he was saying that they could be a kind of turning point(implying an “out” for himself) and today he was doing the same with 4 reasons why i/r’s might stay on hold. But if i/r’s went up I’m sure he would have jumped on the McCrann bandwagon.

  4. As much as I despise the dogmatic approach taken by the BullHawks…I wouldnt be declaring victory at half time – if inflation is again above the range at the next CPI print, then the Bullhawks will rightly be vindicated

    • It all depends what is causing inflation. The way I see it, there was very little demand-driven inflation in both of the past 2 quarters. That may or may not change but I’ve never seen the bullhawks mention or acknowledge this. Raising interest rates in the face of supply-side inflation will simply stimulate further inflation….

      • Good points…

        I think its a bit of both. The supply side factors are what the RBA is focussing on, but the easy money being pumped our by USA Fed is flowing through here, as is China investment and the Government stimulus was also a big factor in stoking inflation – more money chasing same amount of goods increases the cost of goods.

  5. Dumb_Non_Economist

    Hi All,

    Have been perusing this website daily since becoming aware of it the last month and find it a godsend after getting sick of the BS coming out of the MSM.

    I’m somewhat flummoxed by all the talk of consumer indebtedness! It seems to be general accepted that the average joe is hocked to the eyeballs, not just in Oz, but globally as well and if that is the case surely the financial powers that be would not only expect, but applaud the consumer for doing their utmost to reduce it to where it belongs and not get back into a spending spree until they do. However it appears to me they quietly wish for us to open our wallets and start spending again. Where is the money going to come from, and are not we going to end up back at where we started? Can someone explain that to me?

    I’m an average joe and have not a nano of debt, I’m waiting for the housing market to implode so I can walk over the rubble and buy a decent house (for cash) at a decent price for once.

    • I am an Economist by education but a businessman by experience (I think the distinction is important because Economists tend to put too much faith in economic theory and their statistics) and I agree with you about the consumer being cautious because they are geared too heavily and not by choice.

      • I disagree… everyone I know has equity on their mortgage and spare debt-paying capacity. But they’re not buying Jet Skis, they are paying down their mortgages.

        • Spare debt-paying capacity?

          I dont understand that…yes people could take on more debt, if they are willing to eat baked beans 4 nights a week.

          And of course rich people who got into the bubble early will feel pretty good at their current situation, but the fact that there are so many people who entered the bubble late, have massive mortgage stress and higher costs of living – will be the key.

          The whole couuntry doesnt have to be drowing in debt for this economy to tank…only requires people at the margins to start the debt-deflation cycle.

          Once the most financiall strained sell their house, and suffer job losses etc…this will flow through to all areas of the economy and engulf most of the population.

          • Yes Stavros. I am interested in why some people think that consumers are not buying for factors other than too much debt. I’d like to know what these other factors might be?

      • When I am no longer hungry I stop eating. Is it really inconceivable that all the consumer drones out there are just full?

          • I know an economist would say that, but what about someone who gets their hands dirty in the real world ?

        • im envisioning a Japan scenario whereby Australians will avoid any and all debt as the reorder their personal balance sheets no matter how low rates are or how available credit is

  6. H&H we’ll get the allusion of clear air don’t you think from Europe/US, but nothing has changed fundamentally?

    All we got yesterday is another $2.2 Trillion on the US debt credit card. More monetary policy from the FED is just around the corner. Additionally, the EU bailouts. The mounting debt offshore at some point will have an impact on Australia more than what we’re seeing now IMO.

    The RBA has got itself into a bad situation IMO, but Julia says everything is OK. That winds me up.

    I don’t know if you’re seen this [ ], but it going to hack the banks off.

  7. Yeah – The Godzilla v King Kong battle for the soul of interest rates policy definitely seems to have become inflation v disleveraging/deleveraging.

    We may find that even if the CPI roars and fires its wealth zapping lasers it may be no match for the growth draining effects of a large hairy ape chucking lots of spare cash into the nations bank accounts.

    The standing assumption still seems to be that interest rates retain their ‘magical powers’ and cutting them will restore the hormone balance of the great aussie consumer/house speculator.

    Can you imagine the panic if the RBA actually does cut rates and finds the patient has no pulse.

    We can only hope the price of bananas will have returned to normal by then.

  8. “RBA has been so effective in communicating its medium term bias to tighten (something we can perhaps thank the bullhawks for). ”
    Yes, Bullhawks have their place in the propaganda proxy war being fought on the MSM pages/screens on a daily basis. Ahem.. “Useful idiots” is the politically incorrect definition. 🙂
    I hope Glenn will show his appreciation to the bullhawks by throwing them more than a few crumbs.

  9. I’m finding the comments on this site very interesting. Everyone here mostly seems to vindicate the RBA’s decision.

    I don’t. I see credit growth really as the driver for this decision, not global uncertainity. Funny thing is the RBA when house prices were rising and credit growth was growing like mad were quick to justify this. Many things were said such as “our current deficit is a healthy thing”, “our debt levels are sustainable as asset values are underpinning it”, “the market is better at determining the optimal level of debt” etc. In other words if asset prices are rising we will choose to ignore it in our interest rate decisions; they only focused on core inflation in the CPI for consumer goods.

    Fast forward to today and it seems all these factors are now taken into account – only because asset prices could fall. Such double standards here.

    If they were consistent with their previous line of thinking they should of raised rates today. i.e consumer CPI is high, unemployment is low so raise rates.

    Seems like whatever their thinking is at the time it is there to punish savers either way.

    • Mark

      I agree with you in part about the RBA being consistant and stick to their inflationary targets. But we are in unchartered waters. Consider the analogy by one of the MB bloggers about the RBA coming to a T intersection with pedals to steer as there is no steeering wheel.
      they are thinking it is better to go slow and assume when you get there the steering wheel will appear. They are economists after all.
      All they need now is a GPS

      No seriously I think they made a massive mistake during the GFC as consumers stopped spending as they pushed rates up too fast. Only then to put them in free fall.

      The problem that now exists is they dont have to put up rates to spook the consumer. Bring in the Bullhawks and the msm. The fear of lifting rates has been hanging over our heads it seems forever. A new national sport is to wait for the first tuesday of the month every month (not only the Melbourne Cup)for the RBA minutes to come out. This is doing more harm than good and the average joe is fed too much information to understand any of it.
      Thats why wallets will stay closed, debt will continue to be paid down and consumers will stay nervous.
      We are now the unhappy nation afterall.

      which way to go??????
      Put up rates the consumer will be fearful of another one and it will affirm their decision to be cautious. Keep them on hold, they will stay fearful of the next one.
      A no win situation for the RBA. So what can they do in this case. Sit it out!!!

      • The error I see in your post is basing interest rates on economic performance at all. This line of thinking is what has gotten us into this debt mess in the first place. Every time we lower interest rates to save us from a recession and stimulate our way out people take on more debt at the lower interest rate. Because they still use economic growth as a indicator as to what rates will be when the next growth phase comes rates can never be set as high as they would otherwise have been because the pain threshold or sensitivity to debt of the populace is risen. In other words over time the current system is designed to increase our debt to GDP ratio.

        If interest rates were set using a real measure of inflation I doubt people would borrow so much. The moral hazard of borrowing to the max because everyone else is doing it and the RBA can’t raise rates because of this has affected Australia for a long time. In other words the system of looking at other things other than inflation I believe creates a systemic moral hazard favoring borrowing over spending. If IR was set based on inflation rather than the marginal borrowers economic circumstance then people would remember being burnt and therefore would be more prudent with taking on more debt. They definitely wouldn’t take as much debt as they can, and interest rates wouldn’t be trending down to zero over time.

        Of course this is all personal opinion. But looking at other western countries it seems pretty clear to me that the long term trend of interest rates is down as the amount of debt continues to grow.

  10. Maybe they weren’t to know it, but the RBA went a step too far in November last year. This has been clear ever since. The sag in jobs growth – which showed up early in the year – says it all, really. The broad economy lacks the momentum needed to sustain jobs growth and everything that goes with it.

    The weather-induced shocks early in the year, the effect of Q2 on energy and other commodity prices, the higher AUD, and fear of another Euro or US-sourced financial shock have all contributed to the deceleration in our economy. None of these external forces are fueling expansion: on the contrary, they put the economy in low gear.

    Far from having to worry about excessive demand in the domestic economy, the RBA should be paying more attention to tight credit conditions and its many siblings: falling business borrowing and stalling jobs growth; weaker manufacturing and building data; weak consumer confidence and subdued spending.

    The RBA will soon cut.

  11. Sandgroper Sceptic

    Of course they will cut, it is their go to weapon in the top drawer of the desk. But the ponzi is finished, Japan tried it, USA tried it, UK is trying it, cutting interest rates does nothing if no one wants to borrow or banks are too scared to lend. If property markets keep falling then at some point investors will sell in numbers, FHB are tapped out, baby boomers are retiring and selling down assets for cashflow, housing is going to return to being a shelter not an investment asset, one where you could double your money every 7 years.

    We need to fundamentally shift away from consumption being 70% of the economy and housing being our biggest “asset” class.

  12. Of course the RBA has modified it’s inflation target. That’s the obvious and correct response to the current environment. Inflation targeting is not one of the RBA’s primary objectives. Inflation targeting is just a mechanism (one of many) that the RBA has sometimes used (since 1993) to achieve its primary objectives, being…

    1. the stability of the currency of Australia;
    2. the maintenance of full employment in Australia;
    3. the economic prosperity and welfare of the people of Australia.’


    So inflation targeting is just a mechanism that the RBA sometimes uses to meet those primary objectives. Inflation targeting itself is not the objective. As we saw in 2008, the RBA started slashing rates with inflation at 5%. The RBA raised rates over and over again, supposedly to cool inflation, in the years and months leading up to 2008. But despite all those rate hikes, inflation kept on rising to 5%, mainly because that inflation was caused by external forces that the RBA has little control over. Those RBA rate hikes had negligible effect on inflation, apart from strengthening the AUD which would have put mild downwards pressure on some forms of imported inflation. So inflation was well outside the RBA target at 5% when the RBA started slashing rates in 2008. At that time, the RBA members were more interested in ensuring they met their most important two objectives…

    – maintenance of full employment in Australia
    – the economic prosperity and welfare of the people of Australia

    Those two objectives will always come first, for the RBA or any other central bank. Look at the UK or USA – inflation is rampant there and in many other countries, but interest rates are practically at zero. People (voters) come first, not inflation targeting. Any central banker who forgets that will soon find himself out of a job.

    Inflation fell in 2008 due to a reversal of the same external pressures that caused it to rise.

    The RBA are virtually powerless to control imported inflation using interest rates. They will do lots of jawboning and keep on telling us about the dangers of inflation, and tell us that inflation targeting is a primary objective in itself. But it’s not. At the end of the day they will allow inflation to run outside the target range if keeping inflation inside that range would prevent them from achieving their primary objectives (which in the current environment, it would).

    People and jobs come first, before some arbitrary inflation target.

      • Well argued??!?!?!?!

        What does ‘People come first’ mean in this contect…how does inflation help people????

        I thought you were sharper thent hat Cameron

    • How can some motherhood statement be an “objective” if it is not measurable?
      For eg. “the economic prosperity and welfare of the people of Australia” is a “subjective” statement, subject to a million interpretations. The next RBA board can say that the prosperity and welfare of the people is well served by having interest rates at 20%. Will you then agree that it is an objective statement?
      Unless you have discovered a new way to measure the the economic prosperity and welfare of the people, the inflation target remains the only REAL measurable objective of the RBA.

  13. Shadow…inflation is the worst thing an economy can suffer from.

    As you say, the RBA is here to look after “the economic prosperity and welfare of the people of Australia”

    Do you think the cost of food and shelter rising 4%.. (try 7% when they manipulation is factored in) is honestly not damaging to the population?

    As someone that has encourgaed people to take on debt and has probably taken on a ton yourself to speculate on housing, of course you want inflation to erode your debt.

    But dont come on here preaching “People and jobs come first!”

    Its total rubbish and you know it!!

          • Um, so you think Australians dont waste food?

            You dont think there is ability of Australians to swtich foods to cheaper alternativees…or grow their own food.

            When has this argument come from, that inflation of food prices cant be dealt with by rates???

            silly debt addicts! talking your own book and pretending to care about jobs and people livelihood (always the last refuge of a defeated Bull)

          • I didn’t say whether or not I care about jobs and people’s livelihoods.

            I said it’s what the RBA puts first, before an arbitrary inflation target. They just demonstrated this, in the same way they demonstrated it in 2008.

            By the way PuntPal, how goes your legal case against APF?

    • No, I don’t think inflation is the worst thing an economy can suffer from.

      And this isn’t about what I want. What I want is irrelevant. I just call it as it is.

      I had similar discussions with members here a week or two ago, and many people here insisted that inflation targeting was a primary RBA objective and that rates would have to go up to counter inflation regardless of the impact on jobs and prosperity.

      But we’ve just seen from the RBA’s actions that in fact people and jobs do come first (as they should), before some arbitrary inflation target.

      I believe most people would prefer the cost of food go up a bit, rather than be out of a job.

      Lifting interest rates is not going to bring down the cost of food anyway.

      • What does this mean ” we’ve just seen from the RBA’s actions that in fact people and jobs do come first (as they should), before some arbitrary inflation target”

        What does “people come first” even mean??? Its a rubbish statement I expect to hear from the MSM or a poltician!

        Inflation is the worst thing for people, as Romish has pointed out.

        p.s. If you want to come here and stalk me at MB then I will find a way back to APF and humiliate you Bulls the way I did in July. The only response you had was to attack my business… I destroy Bulls for fun…coz its so bloody easy!

        MB is a good blog, with smart people discussing the issues…once again you stoop to the personal level when you lose on the subject matter

  14. Inflation is the enemy as stated by stavros. It erodes the standard of living and acts like a cancer to the economy. anyone who have studied economics know that.
    the RBA is a little stuck on what to do. Raising rates won’t help with inflationary pressures on the non discretionary goods. These inelastic goods will have a pretty constant demand no matter the price. Petrol, fruit, groceries, electricity, beer
    We all still need to eat and drink.

    Stavros, we aren’t resorting to eating baked beans just yet. Yeah sure we do waste too much food. One thing is certain now, you never throw out a over ripe banana!!!