RBA to hold, Mckibbin advises hike

Advertisement

From the AFR this morning:

One of Australia’s top economists, Warwick McKibbin, wants the Reserve Bank of Australia to raise interest rates today to crimp accelerating economic growth.

Professor McKibbin, who was a member of the Reserve Bank board until a few months ago, made the recommendation as a member of the Australian National University’s so-called shadow RBA board.

“Last meeting they shouldn’t have cut rates,” Professor McKibbin said. “They were not reading the boom in this economy as I was reading it; that there was an enormous amount of strong investment.”

He also said the bank had moved last month in anticipation of what it thought might happen in Europe.

“If you’re always adjusting to what you think is going to happen, you’ve got the problem that if it doesn’t happen, you’re in the wrong place,” he said.

…HSBC Australia chief economist Paul Bloxham said interest rates were now “clearly stimulatory” and as the dollar was no longer appreciating, upside risks to inflation were building. With Europe looking to be muddling through its crisis, “there would be an increasing chance that rates will need to be lifted over a 12-month horizon,” Mr Bloxham said.

Regular readers will know my regard for Professor McKibbin. But I can’t agree. In fact, I disagree, completely!

Local data has been better than elsewhere. But let’s keep it perspective. The local data is not pointing to a national boom resulting in an imminent inflation threat. In fact, it’s built in aggregate on disinflation and deflation; in the first quarter GDP deflator, which added 1% to GDP, in the monthly TD securities inflation index which is running at an annal rate of 1.6%, the same in the March quarter CPI.

Advertisement

Globally, yes, we’ve had a decent European save (but far from a cure) and global manufacturing – Europe, US, China, North Asia, everywhere that matters – has fallen into recession. The global economy is still decelerating.

China’s response looks insipid, either due to a determination to keep the boot on realty or through leadership transition distractions. It is increasing likely that the mining investment boom will also peak in the next twelve months.

Against this we have a nice upwards trend in business credit, but it remains miles below its long run averages and ongoing disleveraging by households; a stubbornly low unemployment rate, which nobody actually believes, including the RBA, and one month of R.P.Data house price recovery after the biggest fall in the indexes’ history. There is also the argument that tradeables deflation has offset non-tradable inflation and that is set to wane as the dollar can’t keep going higher. But the dollar is still above parity. Moreover, March quarter national accounts delivered the best GDP per hours worked growth in ten years, suggesting productivity is stirring, which can begin to absorb some of the pressure on labour prices. As well, the developing slackness in global production is also going to weigh on manufactured goods, preventing some of that imported inflation from arriving.

Advertisement

There’s just no urgency in confronting inflation.

That’s not to say we’re not closer to the bottom of this interest rate cycle. Rare futures have cut 70bps points from future easing in June, which is about right:

But markets are still pricing three more 25bps cuts. I don’t know if this will happen any more than you do but I still reckon that rates go lower before they go higher.

Advertisement

On today’s meeting, the markets have swung completely to my view that the bank will hold, now pricing that outcome above 80%:

In sum, the RBA will hold today and give us a slightly more sanguine statement, which is what it should do.

Advertisement
About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.