Economists on rates

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Some bank economist rate takes for you:

Bill Evan’s at Westpac:

As we expected the Board of the Reserve Bank decided to leave the cash rate unchanged at 3.5%. There were some subtle changes in the wording around some of the risks to the outlook but nothing that would indicate a material change in the Bank’s ‘wait and see’ attitude.

On the international front the Governor notes that while China’s growth has moderated it “does not appear to be slowing further”. US growth continues to be described as “modest” while Europe is tagged as displaying the most significant area of weakness – activity contracting: very difficult task for policymakers. The Governor repeats the phrase he used in July, “Europe will remain a potential source of adverse shocks for some time”. Consistent with these views the Governor points out that while global growth picked up early in 2012 it has since softened.

In the July statement the Governor noted that the pace of growth in the domestic economy had been “somewhat stronger than had been earlier expected”. That coincided with the release of the GDP report for the first quarter of 2012 where growth was reported to be 1.3% which saw the RBA revert to its assessment of a growth outlook close to trend. There have been no further GDP prints and accordingly the Governor has retained his assessment that growth is close to trend.

For those “doves” like ourselves who are expecting rates to be cut further in the December quarter partly because of an expected sustained increase in the unemployment rate there was some encouragement in the Governor’s wording. Whereas in July he referred to the unemployment rate remaining low in this statement he notes “unemployment has THUS FAR remained low”. This
may be partly in response to the rise in the unemployment rate from 5.1% to 5.2% as reported for June. The doves also received some encouragement when he referred to inflation being expected to be consistent with the target “over the next one to two years” – no time period was given in the July statement.

On inflation we are also aware that the Bank is concerned to see domestic costs slow due to the likely eventual rise in traded inflation when the exchange rate stabilises. In this statement he recognised that there was some evidence that domestic costs had slowed noting “domestic costs [are required to] continue their recent moderation”. Finally the doves will be encouraged that there appears to be an air of concern around the fact that the exchange rate has remained high despite the decline in the terms of trade.

There were a few comments to encourage the hawks. The Governor noted that “Australian banks have had not difficulty in accessing funding”. He pointed out that “dwelling prices have firmed a little over the past couple of months” and of course is now describing growth as “close to trend”.

Outlook
On July 17 following the release of the July 3 Board minutes Westpac pushed back its forecast for the next rate cut to October/November. Today’s statement gives little encouragement that a move in September can be expected and it may be that even October will be a little early given the likely 0.8% print for GDP growth in the June quarter on September 5 – see weekly note for the week beginning August 3. In that note we also speculated around the growth and inflation forecasts which will be released in the Bank’s Statement on Monetary Policy on August 10. We forecast that the Bank will increase its growth forecasts but revise down the near term inflation outlook.

The Governor once again emphasises that interest rates for borrowers are still only “a little below their medium term averages”. With the exchange rate continuing to rise (up from 1.025 to 1.058 US between meetings); some uncertainty emerging around the unemployment rate; and subdued global growth the case still has to be respectable that rates will need to come down further. However, we have been surprised by the steady improvement, from a low base, in the housing market and the strong prints for retail sales. Business and consumer confidence remain soft and the most likely case continues to be that there is adequate scope for further rate cuts.

The lead indicators continue to point to a deteriorating labour market while confidence that the European authorities will conjure up a credible solution must be fragile at best.

With all this in mind we are still comfortable to predict that there will be, eventually, a clear case for further interest rate relief.

Paul Bloxham at HSBC:
120807 RBA Observer

Ivan Colhoun at ANZ:
ANZ Australian Economic Update – RBA August 2012

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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.