Australia | Oct 12 2006
By Greg Peel
Before Glenn Stevens took over from Ian McFarlane as governor of the RBA last month, he had already built a reputation, over 26 years in service, as a hawk and a fighter of inflation.
Nevertheless, as economists gathered yesterday to listen to Stevens’ maiden speech as governor, there must have been some doubt as to whether Stevens would simply play the hawk card. Petrol prices have retreated, the US economy is slowing, and there has been talk in the US of a potential easing in monetary policy – the bond markets had begun to factor one in.
We have already been given two hikes this year, and in each case mention has been made that time must be allowed to pass before the real effects of this policy change pass through. To respond again too quickly might be a case of kicking the man when he’s down. Economists have been split on their policy predictions – some said no hike this year, others said one, and even the most hawkish had moved to a more tempered view of “probably”.
As late as yesterday morning there were conflicting data coming out. Housing finance approvals fell 1% in August following a rise in July, supporting evidence that momentum in housing finance is easing. Yet consumer confidence bounced back slightly, albeit after a horrific fall the previous month.
Pick any two economists yesterday morning and you were just as likely to get a “no hike” from one and a “November” from the other.
Sentiment might be a little different now. Stevens yesterday managed all but to announce a November rate hike before it had happened.
In explaining his stance, Stevens addressed several issues.
Firstly, he does not buy into the “two-speed economy” argument. This is the one that suggests Australia’s economic growth is being driven only by resource-rich WA and Queensland while poor old NSW and Victoria are struggling. In this scenario it would be dangerous to inflict rate hikes on the most populous states. But Stevens believes there’s only minor divergence, and that resource boom benefits are flowing through to other states as well.
Secondly, in the case of the influence of the US economy, he feels US inflation may yet surprise on the upside (interestingly, the Fed echoed this sentiment in the minutes of their past meeting – released last night). Japan and Europe are also growing, offsetting the specific influence of a US slowdown.
In the case of China, Stevens is not concerned about a US slowdown dragging on Chinese growth. He is more concerned that Chinese prices are rising as cost pressures are rising, and that China will turn from exporting deflation to the world to exporting inflation – a view echoed over recent months by several economists.
Stevens also had his two-bob’s worth over the recent spate of leveraged buyouts in the equity markets. He fears the regearing of balance sheets versus possible future returns.
Stevens’ biggest dilemma, however, is: why is the Australian economy weak (or at least not particularly strong) when employment is surging and productivity has not improved since 2003? The solutions he offered revolved around the data on GDP growth being wrong, or the employment data is simply lagging, or that both are right thus indicating inflation is set to rise.
The latter has been taken as a pre-emptive explanation for what Stevens is about to do in November.
In short, Stevens indicated that there would have to be either a significant fall in September monthly employment figures, or a significant fall in the September quarter CPI, for there not to be another rate rise.
Part one has fallen into place. We learnt this morning that employment numbers had increased by a further 31,400 in September, and that unemployment remains at its lows of 4.8% Economists described these numbers variously as “effervescent”, “extraordinary” and “super-strong”.
Following this data release and Stevens’ speech there are few left in the market not expecting a rate rise in November. If it’s going to come down to the CPI, then what might have changed?
Okay, petrol prices have fallen some. Bananas are still at their peak though, but, all jokes aside, energy and food are removed to equate the “core” CPI, and that’s the number the RBA is interested in. Are prices falling? There’s not a lot of evidence. Retail spending has lifted and consumer confidence has bounced back some.
It is suggested investors prepare themselves for November.