Today’s RBA Board meeting should be a non-event. Given what the RBA said last month, it’s almost impossible to see them doing anything but hold rates steady without upsetting their credibility.
The last part of that sentence was probably a little more aggressive than necessary but it’s clear that the challenge of monetary policy in the current macro-economic environment is felt as acutely at the policy maker level as it is in the punditry.
For example Governor Stevens made the following comment at his appearance before Parliament on February 24th.:
These changes to the macroeconomic picture, against a backdrop of a period of intensified international turmoil, saw the Board lower the cash rate by 50 basis points in the closing months of 2011. Perhaps surprisingly in the face of developments in wholesale funding costs, this was initially fully reflected in a reduction in most lending rates, though there has been a partial reversal of that recently. We have repeatedly made clear that the shifting relationship between the cash rate and other rates in the economy is a factor the Board takes into consideration in setting the cash rate.
You can see that either the Governor, Board or both, thought that the December easing was going to be cover for the banks to increase their margins on loans by not passing on the entire cut – say 10 or 15 basis points but not the full 25.
But when the banks bowed to political pressure, the RBA felt it could hold in February against market expectations, given they think they have managed to get the Australian economy into a Goldilocks moment or sweet spot. But by February the banks were looking for the cover to boost margins and, when the RBA didn’t provide it, lifted their home loan rates unilaterally.
So you can see there has been a lot of gaming going on in the past few months: the RBA with the majors and the economy; the Government with the majors the RBA; the majors with their customers; the media and Government with the smaller ADI’s as they try to keep their rate rises under the radar, to a large extent because their margins are under more pressure than the majors.
But the most fascinating gaming going on is from the RBA itself with the Chinese, global and local economies.
Over the past couple or few years the RBA has assiduously stuck to its view that the mining boom will save us, or in their original terms of 2010 and early 2011, that the rest of the economy needed to be put under pressure to make way for the mining boom.
That is, in aggregate, Mining Boom Part II would not be allowed to push the economy into the inflationary spiral it launched into with the 5% print in Q3 2008. They believe in the boom and they believe in China so for the greater good the domestic economy was put under pressure and the Australian dollar was let loose.
Last year’s easings were simply a reflection of the “central tendency v risks to same” approach that the RBA has articulated over the years.
As such, the RBA remains an unreconstructed mining boom advocate, as Glenn Stevens also highlighted back on February 24th when he said:
Perhaps what is most noteworthy about the Australian economy is the way in which the drivers of growth have changed in recent times. The Bank has spoken at length before about the terms of trade, and the resulting resource investment boom, which is still building and which will take the share of business investment in GDP to its highest level for 50 years. We have spoken also about how, on the other side, household behaviour has
changed – people are saving more and borrowing less. Spending is growing in line with income, but people are spending their money differently. The retail sector is finding it has to adapt to this changed environment. Some other industries are struggling with the high exchange rate. Meanwhile certain service sectors are growing quite smartly. Hence, while the economy overall has recorded ‘average’ growth, few sectors are in fact experiencing ‘average’ performance themselves – some are clearly quite weak relative to average, while some others are much stronger.The Bank is quite aware of these differences and the pressures they bring to businesses and individuals. But we also know that monetary policy cannot remove the forces generating different paces of growth in our economy. We have to keep our eye on the overall performance of demand and prices. We are acutely conscious that history may offer limited guidance in assessing the net impact of the disparate and very powerful forces that are at work. Nonetheless, that is the assessment we must try to make.
This strikes me central banker speak for “we are trying to do our best – please bear with us”. We don’t really have any choice, so yes Glenn, the retailers, manufacturers and industry buffeted by mining and the high Australian dollar will bear with you and hope you get it right.
Now my guess is that you may be wondering why I’ve gone back to a speech given on February 24th and not looked at the plethora of data out yesterday here in Australia or recently in China, Japan and Europe.
The ready and accurate answer is to quote a conversation we had amongst the MacroBusiness team yesterday in which David Llewellyn Smith (AKA Houses and Holes) our resident data watcher said:
Why would they cut? All of the data has gone their way since they said a “material” downgrade to demand was needed…
So against this back drop and with markets and economies seeming to have improved over the past month, the RBA is going to remain on hold again this month.
Is there another cut in the pipeline? I believe there is. The debt burden and asset price levels in our old economy do not sit comfortably with the capex boom and inflationary bursts in our new economy and the result is a lurching in activity as the adjustment from one to the other takes place. For the time being, however, the hurdle rate for the next cut remains very high and a material deterioration in the Australian or global outlook is required.
Have a great day.
Gregory McKenna
www.twitter.com/gregorymckenna
Please remember these are not recommendations for you to trade these are my views and I have my risk management tools and risk parameters that you do not have access to. Thus, this blog is for information only and does not constitute advice. Neither Greg McKenna nor Lighthouse Securities has taken your personal circumstances, objectives or financial situation into account. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs.