RBA buys time – wants to hike!

Could the RBA have issued a more aggressive statement without actually tightening? I can’t imagine they could have.

I’m probably out on a limb here because the AUD has sold off to 1.0899 from 1.1068 last night and the 3 year swap rate is down at 4.67% from 4.83% this morning and 4.95% last week after the CPI. But for my money I think the RBA just can’t find the excuse and maintain its credibility with the Government or the Australian people.

Consider this final paragraph from today’s statement,

At today’s meeting, the Board considered whether the recent information warranted further policy tightening. On balance, the Board judged that it was prudent to maintain the current setting of monetary policy, particularly in view of the acute sense of uncertainty in global financial markets over recent weeks. In future meetings, the Board will continue to assess carefully the evolving outlook for growth and inflation.

Now compare that with the final paragraph from last month’s statement,

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.

That gets filled under “things that make me go MMMMMM” .

I think they are sending a message loud and clear that, sorry Bill Evans, we didn’t consider cutting rates nor did we consider just if rates “remained appropriate” no we discussed and considered whether the inflation situation “warranted further policy tightening”.

No mucking around there, no room for misunderstanding where the RBA continues to see the risks to the economy. It just screams inflation, capacity constraints and low productivity. They also firmly retain their central mining boom, China, India central tendency as well.

I have only read one summary so far this afternoon and it’s from Macquarie Bank who argue that the window is shutting on the RBA in terms of opportunities to hike because the domestic economy is getting weaker. you won’t be surprised to hear that I strongly agree with this thought line.

But it seems clear to me in this statement today from RBA Governor Stevens that he does not.

Lets have a quick look at the rest of the statement.

Global Growth

The global economy is continuing its expansion, but the pace of growth slowed in the June quarter. The supply-chain disruptions from the Japanese earthquake and the dampening effects of high commodity prices on income and spending in major countries both contributed to the slowing. It is still not clear how persistent this slower growth will be. The supply-chain disruptions are now gradually abating and commodity prices have softened of late, though they generally remain high. In China most indications suggest only a mild slowdown so far.

The central scenario for the world economy over the next couple of years envisaged by most forecasters remains one of growth below the pace of 2010, but at or above long-term averages. Downside risks have increased, however, as concerns have grown over the outlook for the public finances of both Europe and the United States.

Interpretation – even with everything happening overseas global growth in aggregate is still going to be relatively strong and “at or above long-term averages”. So stop wringing your hands and gnashing your teeth it will be OK and by the way China is OK too.

Australian Growth

Australia’s terms of trade are now at very high levels and national income has been growing strongly. Investment in the resources sector is picking up very strongly and some related service sectors are enjoying better than average conditions. But in other sectors, cautious behaviour by households and the high level of the exchange rate are having a noticeable dampening effect. The impetus from earlier Australian Government spending programs is now also abating, as had been intended.

The resumption of coal production continues, but a full recovery of flood-affected production now looks unlikely before early next year. Precautionary behaviour by households also looks likely to keep some areas of demand weaker in the near term than earlier expected. Overall, growth in real GDP through 2011 is now likely to be at about trend. Over the medium term, overall growth is still likely to be at trend or higher, unless the world economy deteriorates noticeably.

Interpretation –  Australia is making plenty of money and we are investing for our future even though households won’t spend and the Aussie is taxing business. Oh and by the way we knew that the Government stimulus would fade.  But in aggregate, and remember we can only manage the economy in aggregate even with Household retrenchment we are still going to get trend growth in 2011 and over the medium term higher. So stop wringing your hands and gnashing your teeth, it’s going to be OK.


Growth in employment has moderated and the unemployment rate has been little changed, near 5 per cent, for some time now. Reports of skills shortages remain confined, at this point, to the resources and related sectors. After the significant decline in 2009, growth in wages has returned to rates seen prior to the downturn, though productivity growth remains weak.

Interpretation – now this is something to wring hands and gnash teeth about. Wages are rising and productivity is weak even though skills shortages haven’t seeped into the broader economy. Heaven help us when the Sun comes out!


Year-ended CPI inflation has been high, affected by the extreme weather events earlier in the year. As these effects reverse over the next couple of quarters, CPI inflation should decline. But measures that give a better indication of the trend in inflation have begun to rise over the past six months, after declining for the previous two years. While they have, to date, remained consistent with the 2–3 per cent target on a year-ended basis, the Board remains concerned about the medium-term outlook for inflation.

Interpretation – Sorry Warren Hogan, while the headline is up and the underlying rising we reckon inflation is coming down. We are concerned but as you know any one meeting doesn’t matter.

Summing it all up

It is appropriate under such circumstances for monetary policy to exert a degree of restraint. Most financial indicators suggest that it has been doing so, as a result of the Board’s decisions last year. Credit growth has declined over recent months and is very subdued by historical standards, even with evidence of greater willingness to lend. Most asset prices, including housing prices, have also softened over recent months. The exchange rate is high. Each of these variables is affected by other factors as well, but together they point to financial conditions being tighter than normal.

Interpretation – Don’t kid yourself that rates should be coming down, reread what we just wrote above. Sure credit growth is down and house prices are under pressure while the Aussie is up which all points to a tightness of policy. That’s what we wanted – so don’t expect us to change in a hurry.

Which leads us back to that fabulous paragraph about the decision on whether or not to tighten.

Clearly this is my interpretation of what the Statement by the Governor meant but I think you can see a Central bank that believes the risks for the Australian economy are still skewed toward growth and inflation not threatened long-term by the household restraint.

This is where we differ with the RBA we think household retrenchment is structural not cyclical but as I have argued in the past(here) the RBA has a structural bias to tighten and it is only household weakness and offshore uncertainty that is stopping them from exercising this bias.

So they have bought time. Time that I think ultimately will show them the underlying weakness in the domestic economy and forestall the need for any rate hikes anytime soon. But it seems only a catastrophe globally is going to get them to cut rates any time soon. I wouldn’t be surprised if the Statement on Monetary Policy release this Friday isn’t a rerun of last May when the document was surprisingly hawkish and I am certainly interested in the release of the minutes in two weeks time as I think they might be likewise skewed.



This blog is for information only and does not constitute advice. Neither Greg McKenna nor Lighthouse Securities has taken your personal circumstances, objectives or financial situation into account. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs.

If you do need economic, investment or financial advice we are happy to help.

Please Email the team at Lighthouse at info@lighthousesecurities.com.au or Greg directly on greg@lighthousesecurities.com.au




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