There’s a couple of articles about today from veteran commentators looking to make headlines rather than sense. The first is by Peter Martin who argues or quotes from someone who argues, that Israel is a terrific leading indicator for Australian interest rates:
Could Israel hold the key to next week’s Australian decision on interest rates?
Martin Whetton, an interest rate strategist at Nomura Group, thinks so. He says Australia’s Reserve Bank has followed Israel’s central bank on 16 of the past 19 occasions it moved rates.
The Bank of Israel has just cut rates for the third consecutive meeting. If Australia’s Reserve Bank cuts on Tuesday week it will be the third consecutive occasion.
There is some correlation between Israeli interest rates and Australian, just as there is Chinese,US, NZ, Eurozone, South American, South African etc, etc…
Needless to say, it is an infinitely better approach is to look at the domestic economy and make your determination there. That is partly the approach of David Uren at The Cupboard today:
At each of the last two meetings, senior RBA staff have argued that the central forecasts for neither the Australian economy nor the major world economies justified a change in the bank’s long-standing view that the massive resource investment boom would stretch the economy’s capacity and increase inflationary risk.
Australia’s trading partners, including China, were continuing to record strong growth. Although it was easy to paint scenarios for Europe that would resemble the 2008 Lehmans collapse, this had not yet happened and the bank would have time to respond forcefully when and if it did.
The prevailing argument, endorsed by governor Glenn Stevens, was that the downside risks were sufficiently serious to warrant a response and that downward revisions to Australia’s inflation by the Australian Bureau of Statistics meant the upper limit of the bank’s 2-3 per cent target range was not in danger of being breached. In these circumstances, the bank could justify shifting the official interest rate from a level calculated to restrict economic activity to one that was “more neutral”. The official rate was brought down in two steps from 4.75 per cent to 4.25 per cent.
Senior bank officials now argue that further rate cuts would shift monetary policy into stimulatory territory. An extra burden of proof would be required.
He goes on to argue that:
China’s economy is also looking better than was feared at the end of last year. The December quarter annual growth rate of 8.9 per cent was the lowest in two years, but was ahead of expectations. The chief executives of both Rio Tinto and Anglo American said last week they expected growth to continue at roughly this rate throughout 2012.
There is nothing in this global outlook to derail Australia’s resource investment boom.
The RBA is likely to see the prospect for domestic growth in 2012 as a bit more subdued than the 4 per cent calendar year average it forecast in November, but it is still likely to see growth at around the long-term trend.
Although employment growth has been subdued, the jobless rate has remained steady at about 5.2 per cent, with the economy doing surprisingly well in creating enough new jobs in service sectors to supplant those being lost in manufacturing and building construction.
The core rate of inflation is now comfortably in the bottom half of the RBA’s target range and is no impediment to cutting if it felt the need, but it is not easy to craft the compelling case for lower rates.
When the RBA cut rates in December, senior bank officials expected only half the cut to be passed on to mortgage holders and were surprised that the government’s hectoring resulted in full pass-through.
Real rates are possibly a bit lower than the board intended them to be, although the rise in the dollar has contributed to a modest tightening in monetary conditions since the end of the year.
Traces of the disagreement at the bank’s top level have come through in the board meeting minutes, with the presentation of both sides of the argument “on the one hand” and “on the other”. In December, it was agreed there was “no strong need to cut interest rates”. There is less need now.
Against this background, the Board considered the question of whether a further reduction in the cash rate would be appropriate following the reduction in November. On the one hand, there had been further evidence that a major investment boom was in progress and the overall economy was expanding at a pace broadly in line with trend. Australia’s main trading partners were also still recording solid growth. This did not suggest any strong need to cut interest rates. Against this, developments in Europe continued to pose downside risks to the global economy and, consequently, also to Australia. These risks had, if anything, increased though the timing and magnitude of any effects that might flow from them remained very difficult to predict.
But there is one major mistake in Uren’s thesis. The RBA appeared uber-hawkish all of last year on the medium term mining boom thesis and it never raised rates. Indeed it cut by year end to the surprise of most economists (not MB of course). The mistake many economists made is replicated by Uren today. In rates, it never pays to play the man over the ball. The RBA makes decisions based on what the data says about the economy, no matter what its models tell it.
So what is the data saying? Inflation is contained (no matter what certain hawks and markets will tell you) so that is not a consideration for now. Growth is very patchy: incredibly powerful in very narrow sectors of mining that employ few people and structurally weak in other much higher employing sectors like retail, manufacturing and tourism. As the weak December labour force numbers showed, unemployment is rising even if the official measure is being masked by a fall in the participation rate. Moreover, the likelihood that the decimation in part time jobs in December shows that the economic adjustment from debt-driven consumption to production in mining can proceed in step-shifts as labour hoarding suddenly unwinds in specific sectors. I expect this shift towards productivity improvement to spread. The high dollar and weak debt-growth continues to pour pressure on these same sectors.
In the real economy, unemployment is going higher. For the time being, I see no compelling reason, therefore, why rates aren’t going lower, beginning in February.
