From Paul Bloxham at HSBC:
Today’s speech by the Governor noted that the recent Q2 inflation data were low enough to leave the RBA with further scope to ease policy. The speech was fairly downbeat, noting that mining investment had now peaked and that the ‘rotation’ of demand away from mining had been only gradual, partly due to weak confidence. The Governor once again advised policymakers that some consistency about the policy framework and objectives would assist to lift confidence. We expect the RBA to deliver another rate cut next week, though there remains a risk that the AUD could fall sharply in coming days and do the work for them.
Lock in the cut irrespective of the dollar. Bloxo went on:
Facts
– For near term monetary policy, the key sentences were: ‘We have been saying recently that the inflation outlook may afford some scope to ease policy further if needed to support demand. The recent inflation data do not appear to have shifted that assessment.’– For the medium term outlook: ‘Let’s be clear that Australians will continue to benefit from the higher level of resources output for a very long time. There has been a large lift in the global demand for natural resources that our country happens to have in abundance.’ He also noted, however, that ‘the normal level of interest rates could be lower than in the past’.
– On the AUD: ‘The exchange rate appears to have been behaving more normally of late’, though he also noted that ‘the recent decline in the exchange rate seems to make sense from a macroeconomic perspective … [and] … it would not be a major surprise if a further decline occurred over time, though of course events elsewhere in the world will also have a bearing on that particular price’.
– On the global scene: ‘Reasonable global growth outcomes obviously would be a major help. At this stage global growth is sub-par, though not disastrous, with most forecasters saying next year will be better.’ On China he suggested that ‘growth reflects what policymakers there wanted’.
Implications
The RBA Governor delivered a fairly downbeat speech today, entitled ‘Economic Policy After the Booms’. By ‘booms’ he was referring to the end of both the leverage-fuelled consumption and housing boom of the early 2000s and the mining investment boom of more recent years.This speech marked the first occasion when the RBA seems to have declared that mining investment is now passed its peak. Though the Governor was also careful to point out that the export stage of the mining boom was yet to come and that Australian’s would continue to benefit from this for a ‘very long time’.
On the short term policy outlook, he confirmed our own views that last week’s Q2 inflation print was low enough to leave the RBA with room to cut rates further if needed.
He also suggested the ‘rotation’ of demand – what we have been calling ‘Australia’s great rebalancing act’ – has been only gradual, suggesting that the economy is currently tracking below trend.
A key reason for the slower than expected ‘rotation’ has been a lack of confidence. The Governor noted that this is partly because of a lack of clarity of the ‘policy framework and objectives’. In our view, this is a clear reference to recent political uncertainty hampering business confidence.
Bottom line
Today’s speech by the RBA Governor was fairly downbeat and confirmed that last week’s inflation print was low enough to leave the RBA with further scope to ease policy.We expect the RBA to cut the cash rate next week, although this is somewhat conditional on the level of the AUD in coming days. An AUD around its current level is likely to see the RBA still feel the need to cut rates next week.
Fair enough. But those waiting for “confidence” to return to business and consumers better be sitting in a comfy chair. Glenn Stevens included.
