Well, I was right about one thing after the RBA meeting this week. There was something for everyone and the debate will rage!
We had a dovish statement Tuesday and now a hawkish one today. Following this morning’s RBA SoMP, Adam Carr is back claiming victory:
At the very least we know they are closer to my view than they were and that’s a good thing. Certainly these forecasts imply that we will get more than two rate hikes over the next 12 months. But will they hike in June?
For mine, the forecasts suggest ‘yes’. It would be truly incredible for them, with this growth and CPI profile which they’ve just upgraded – to now turn around and wait a quarter of a year before doing anything.
And what’s more, there’s some heavy support piling in behind. From Westpac’s Bill Evans this morning:
RBA surprises with hawkish rhetoric and bullish forecasts – expect a rate hike in June
The Reserve Bank’s Statement on Monetary Policy (SoMP) has printed a set of forecasts that indicate that the Bank is very close to raising interest rates. We have consistently argued that the next move will be in the September quarter but a move in June has now become the more likely result.
In assessing the Bank’s intentions the key indicators are their forecasts and the choice of words in the final paragraph of the introduction which assesses the policy stance. In today’s final paragraph the following words are used: “The central outlook selected above suggests that further tightening of monetary policy is likely to be required at some point for inflation to remain consistent with the 2-3% medium-term target.” Compare this with a statement in October 2010: “If economic conditions evolve as the Board currently expects, it is likely that higher interest rates will be required, at some point, to ensure that inflation remains consistent with the medium-term target.” Recall that the Bank tightened at the following Board meeting in November.
I must admit, that similarity in language is pretty compelling. If we take a step back, however, and take the language on its merits, it says more rate rises will be needed “at some point”, which hardly seems imminent.
Moreover, I reckon the SoMP is a long horizon document. The meeting statements are short horizon. So Bill Evans may be comparing the wrong two closing statements. Here’s is the closing paragraphs from October 2010 meeting statement, a month before hiking:
As in the previous month, members concluded that interest rates would need to rise at some point if the economy evolved in line with the central scenario of a gradual tightening in resource utilisation, as this would most likely result in a gradual strengthening of inflation pressures. The timing of adjustment remained a matter of judgement. A case could be made to increase the cash rate at the current meeting, based on the medium-term inflation outlook and the fact that developments had continued to be broadly consistent with the central forecast scenario. The case to wait before making a tightening move was that the economy was still expected to continue growing at trend in the near term, credit growth had softened somewhat and the rise in the exchange rate would, if it continued, effectively be tightening financial conditions at the margin. Moreover, it was still possible that downside risks to global growth could materialise. Members felt that these arguments were finely balanced. While the Board recognised that it could not wait indefinitely to see whether risks materialised, members judged that they had the flexibility to do so on this occasion. Overall, they concluded that it would be appropriate to hold the cash rate steady for the time being, pending evaluation of further information at the next meeting.
That’s pretty clear to me. Says we’re ready to hike, if all things remain equal. Here’s what they said Tuesday:
Looking through these short-term movements, however, the recent information suggests that the marked decline in underlying inflation from the peak in 2008 has now run its course. While the rising exchange rate will be helping to hold down prices for some consumer products over the coming few quarters, over the longer term inflation can be expected to increase somewhat if economic conditions evolve broadly as expected. At today’s meeting, the Board judged that the current mildly restrictive stance of monetary policy remained appropriate. In future meetings, the Board will continue to assess carefully the evolving outlook for growth and inflation.
No “finely balanced” here.
Fact is, as we at MB have been arguing for some time, the RBA has a bias to tighten. They clearly want to raise rates. No doubt about it. But. They are in a bind. Glenn Stevens’ Tuesday statement recognised the source of the problem:
Overall credit growth remains quite modest. Signs have continued to emerge of some greater willingness to lend, and business credit has resumed growth after a period of contraction. Growth in credit to households, on the other hand, has softened recently, as have housing prices in several cities. The exchange rate has risen further and, in real effective terms, is at its highest level in several decades. This, if sustained, could be expected to exert additional restraint on the traded sector.
This was new wording and intrinsically recognised that the two losing sectors in Australia’s rebalancing – non-resource exports and housing – are showing strain.
So the bind is this. For months, the RBA has been embarked on a project that I call the Great Disleveraging. It is trying to shift Australia’s growth model from its former driver of growth in consumer and mortgage debt towards the business investment surrounding resources. It is doing this by forcing down the rate of growth of household debt through jawboning and mildly restrictive rates. It is also aiming to keep inflation within its mandated limits. The problem is, the housing market and mortgages are rolling toward outright deleveraging (this week both UBS and Goldman warned clients another rise threatens a crash) even as inflation is simmering.
The question we need to ask – not just for the June meeting but those beyond it – is will the RBA let housing get disorderly in the name of controlling inflation? The answer may be that it will have no choice.
