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
