The persistently hawkish RBA Shadow Board calls for a hold today:
Since the RBA dropped the cash rate to 2.75 percent last month the Australian dollar has fallen to below 96 US cents, a depreciation of more than 7 percent against the US dollar. With weaker data coming from China, India and Europe and mixed data coming from the US, the rapid fall in the Aussie dollar highlights the downside risks to the Australian economy, as perceived by the markets. Will the dollar slide further in anticipation of mounting downside risks, or will the current level suffice to boost Australian exports and breathe new life into the Australian economy?
The tug-of-war between the need to lower the cash rate due to sustained weakness in the Australian economy and the need to raise the cash rate in response to the expansionary stimulus emanating from the historically low cash rate and the weakened Aussie dollar, is clearly on the minds of the shadow board members.
The strong consensus of the nine members is that the Reserve Bank of Australia should leave interest rates unchanged from May at 2.75 percent.
The probability that rates should rise in the next six months equals approx. 1/3, somewhat less than the risk that rates should be lower.
Over the longer term, in the next twelve months, the Shadow Board members anticipate that the probability of a rate increase is around 40 percent, slightly more than the probability of a fall. Overall, compared to previous months, there has been a small shift in favour of lower interest rates at the 6-month and 12-month horizon, reflecting concerns about muted consumption, weaker global demand, falling commodity prices and tighter fiscal policy following a likely change of government later this year.
It’s about time that this shadow board started to see the risks in the dollar. Let’s check out its record to date, based upon member comments:
- March 2012: hawkish, actual hold
- April 2012: neutral, actual hold
- May 2012: dovish, actual 50 bps cut
- June 2012: neutral, actual 25 bps cut
- July 2012: neutral to hawkish, actual hold
- August 2012: neutral to dovish, actual hold
- September 2012: neutral to dovish, actual hold
- October 2012: neutral to dovish, actual cut 25bps
- November 2012: neutral, actual hold
- December 2012: neutral to dovish, actual cut 25bps
- February 2013: hawkish, actual hold
- March 2013: hawkish, actual hold
- April 2013: hawkish, actual hold
- May 2012: neutral, 25bps cut
And finally today’s comments suggest a neutral stance with James Morley worried about “propping up a housing-market bubble”, that is, the Australian economy.
My assessment is that as a group the board has been a decent guide to the thinking of the RBA, picking up broad shifts in the tone of the data. The member that comes out best in terms of presaging the actual results is Mardi Dungey. Paul Bloxham runs a close second. They are the two doves on the board.
Several members don’t seem to care much with little comment. A pair of hawks in James Morley and Jeffrey Sheen would already have had Australia in recession and Warwick McKibbin is somewhere in between the hawks and doves.
Had the RBA Shadow Board been in control over the past two years, I think it reasonable to conclude that the economy would be in considerably worse shape with a much higher dollar and much more pressure on households than we currently see.
Perhaps most disappointing, however, has been the board’s complete failure to engage in discussion of monetary policy innovations and context including: quantitative easing, how to survive currency wars, what should our fiscal goals be, macroprudential policy and what is the trajectory of the mining cliff. If the shadow board is not a place where thought balloons can be floated and thrashed out, helping offset the publicity constraints placed upon the actual RBA, then what’s the good of it?