Australia | Aug 02 2011
By Greg Peel
At first glance the RBA's August monetary policy statement appears very similar to July's until one looks a little closer. Various clues then emerge that the central bank sees a weaker environment today than it did a month ago. Those clues do not detract from the inflation threat attributed to the mining sector, but they do support the board's leaning towards prudence at this time.
In July the RBA noted the global economy was growing moderately, but the “key question is whether this more moderate pace of growth will continue”. This month however, the board was more downbeat, suggesting “it is still not clear how persistent this slower growth will be”. And while Europe was in the headlines in July, this month both Europe and the US came in for mention as regions of concern.
Last month the resumption of Australian coal production post-disasters was proceeding “more slowly than initially expected”. This month, “a full recovery of flood-affected production now looks unlikely before early next year”.
This month another factor was added, being that “precautionary behaviour by households now looks likely to keep some areas of demand weaker in the near term than earlier expected”.
The RBA reiterated its expectation that Australian economic growth over the medium term is likely to be “at trend or higher,” but the caveat has changed. In July, it was “if the world economy grows as expected”. In August, it's “unless the world economy deteriorates noticeably”.
The RBA reiterated that Australian wages had returned to pre-GFC rates, but this month added “though productivity remains weak”.
In July, credit growth remained “modest”. In August, credit growth is “very subdued by historical standards”.
In August, a whole new paragraph has been added:
“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.”
On the strength of all of that, you would have to believe it is the ANZ economists, who had backed a rate rise today, who are misguided and that the Westpac economists, who have declared a lonely expectation that the next move in rates will be down, are looking like the prescient ones.
Except for a couple of subtle words.
In July, the board noted “investment in the resource sector is picking up strongly”. In August, the board notes “investment in the resource sector is picking up very strongly”. Did you spot it?
And then the real clanger. With respect to inflation, the RBA suggested in July that “a gradual increase is expected over time”. In August the statement suggests that “the board remains concerned about the medium term outlook for inflation”. It may now “remain” concerned, but the RBA did not use the word “concern” in July.
Indeed, while it was clear in the July conclusion that a rate rise at that time was not contemplated, in August, “the board considered whether the recent information warranted further policy tightening”. They ran it up the flag pole folks but much to ANZ's irritation they chose not to salute. Instead, they decided it would be “prudent” to stay on hold for now, “particularly in view of the acute sense of uncertainty in global financial markets in recent weeks”.
My conclusion is thus: Despite the horrible picture the RBA paints today of the domestic Australian economy, that picture will not prevent the RBA from raising. It now depends only on the global picture, and the level of uncertainty in global markets. If uncertainty abates, in the US and Europe specifically, then we're going up. Until then – and that “then” might yet be a-ways off yet – we'll stay put at the “mildly restrictive” rate of 4.75%.
The sun is up, the sky is blue, it's beautiful, and so are you dear Prudence.
Read the full statement here.
