RBA goes back to the future – Mining will save us

February 7, 2012

RBA and Interest Rates

Yesterday the RBA decided to leave rates on hold, much to my chagrin to be honest. But it’s not the first time I have differed in my views from the RBA – last year when they were talking up rates was just the most recent case in point.

But in the spirit of what I saw in the Statement from the Governor yesterday I decided to drive my DeLorean into the office today – well I didn’t really – but yesterday’s RBA Governors Statement was something straight out of the “she’ll be right mate – we’ve got a mining boom” school of thought that we saw in 2011 before the imperative of household retrenchment and de-leveraging aided by a little bit of European turmoil saw the RBA cut.

And it does feel a little bit like back to the future from the RBA. That’s not to say that I didn’t get it wrong yesterday and not to say that the wording in the Governors Statement doesn’t suggest that I got it wrong but that I got it horribly wrong. But it is to say I think that like 2011 the RBA is wrong on this “she’ll be right mining boom not worried about households” approach they are reverting to.

I spent a lot of spare time last year researching the hub and spoke – central tendency/risks approach to Monetary Policy that the RBA follows and blogged it here at MacroBusiness and this informed my thinking across the year and saved myself and those I work with quite a bit of money as the economic situation evolved.

But it doesn’t change the fact that I think the RBA has a structural bias to tighten given its raucous cheerleading of the mining boom and China growth story.

 

Here is the wordle version of the RBA Governors Statement and you can see just how big inflation looms in the document as does conditions, growth and declined. Indeed I look at this in the context of the current market environment and I look at the first 4 paragraphs of the 5 paragraph Statement and I read a story that could have supported an easing.

 But then I get to the last paragraph and I read,

 “With growth expected to be close to trend and inflation close to target, the Board judged that the setting of monetary policy was appropriate for the moment. Should demand conditions weaken materially, the inflation outlook would provide scope for easier monetary policy.”

They are not concerned with the structure of or make up of growth just the overall growth number, fair enough – but this is heavily mining investment and boom related.

But here is the big question for all of us trying to read their thinking – what exactly does “weaken materially” mean?

Is the RBA saying the economy has to fall in a hole now for further monetary accommodation and if so how big does the hole have to be. We’ll have to wait and see as the data evolves but even with a bias to ease that the RBA suggests it has, the hurdle rate, in terms of economic weakness, for the next cut just got a lot higher.

Have a great day

www.twitter.com/gregorymckenna

Please remember these are not recommendations for you to trade these are my views and I have my risk management tools and risk parameters that you do not have access to. Thus, 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

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