Australia | Dec 18 2012
By Greg Peel
“Members noted that global currency markets had also been relatively quiet in November, with exchange rate volatility low, although the Japanese yen had depreciated by around 3 per cent against the US dollar. The Australian dollar was little changed, remaining at a high level.”
The above statement seems almost like a throw-away line from the RBA. Yeah…the Aussie's still high, but it hasn't done much lately. Interestingly, while this particular paragraph appears in the minutes of the December RBA policy meeting, released today, it does not appear in the important Consideration For Monetary Policy section, but rather the more chatty Financial Markets section. This would seem to imply that the strong Aussie dollar, while crippling many Australian businesses, is not something the central bank need concern itself with when it comes to setting rates.
It must be acknowledged that, under normal circumstances, the RBA does not have a mandate for currency manipulation. The central bank will sell foreign currencies holdings when the Aussie market is volatile to the downside as a smoothing effect, and buy foreign currency in the same case on the upside. The RBA is effectively thus always buying Aussie low and selling it high over time, which is a nice little earner, but profit is not the motive – volatility smoothing is.
Recently the RBA has not balanced up its currency books to the full extent as it might otherwise do over the course of business, translating in a minor form of intervention, but this is nothing like the scale of intervention…manipulation…call it what you will, being undertaken by the likes of the US, Japan, the UK, Europe and others across the globe at present. When it comes to the strong Aussie, the RBA has acknowledged its impact on the Australian economy. When it comes to determining the cash rate setting, the Aussie is not the primary consideration.
Inflation is. Or at least inflation seemed to be the factor most concerning the RBA board as it yet again lowered the cash rate earlier this month to 3.00%. In simple terms the RBA's mandate is to use open market operations (pulling money out / putting it into the system) to contain volatility in GDP growth/contraction and (since the 1990s) to keep inflation within a target range. Currency control should, under normal circumstances, result indirectly from monetary policy changes.
It hasn't, however, and that is putting the RBA at odds with an awful lot of Australian economists, let alone business groups. The statement which accompanied the rate cut this month had some concerned as it gave the impression this cut to 3% might be the last Australia will see. There was a certain finality in the suggestion from Glenn Stevens that this last cut “will help to foster sustainable growth in demand and inflation outcomes consistent with the target over time”. This month, unlike previous months, Stevens did not suggest the Board would “monitor” the situation ahead. No more monitoring, no more rate cuts?
Despite the December statement, economists continue to forecast a lower cash rate in 2013. ANZ sees four cuts to an eventual 2.00% and Deutsche sees three to 2.25%, just to pick two examples. These forecasts are based on the Aussie dollar and the impact of ongoing – endless – global currency debasement. The Aussie dollar broke with its commodity price correlation in 2012. The amount of offshore funds being chanelled into the ramp-up and ongoing maintenance of massive resource sector projects, particularly LNG, is keeping the foreign currency flowing in and the Aussie supported. Secondary to this impact are the foreign fund flows into Aussie investments – bonds, and the stock market, and into other assets such as property. The yield gap between that available in both developed and developing countries and in AAA-rated Australia remains substantial and attractive in this post-GFC, low-yield world. One little 25 basis point cut has made little difference, and is not likely to. Further QE or similar offshore will only send more funds Australia's way.
There is little chance the Aussie can fall. There remains a good chance the Aussie can keep rising.
The RBA noted in its minutes, nevertheless, that “For inflation to remain contained, ongoing productivity growth and a further sustained moderation in wage growth would be needed,” highlighting the central bank's inflation concerns. For the time being, the RBA acknowledges wages have fallen slightly recently and that employment growth will likely remain modest in the months ahead. It also suggests the rebound in housing investment is no more than “modest” at this stage, and that non-mining investment overall remained “subdued”. That's why we were afforded this month's cut. But reading between the lines, it appears the board – which was very caught out by inflation in 2008 – is very scared of causing an inflation spike with too-low rates.
At the end of the day, the decision to cut this month was no lay-down misere. The RBA has publicly declared its view on the need for industries within the non-mining sector to pick up the slack as the mining sector backs off, and this last cut seems to be the central bank's means of achieving such a goal:
“Following earlier decisions, lending rates were now [before the December cut] clearly below their medium-term averages, although they remained above the levels reached in 2009,” the minutes note. “Some of the expected effects were starting to be observed and further effects could be anticipated over time. At the Board's previous meeting, members had considered that further easing may be appropriate in the period ahead, but had decided to maintain the existing setting for the time being, in view of the slightly higher-than-expected September quarter CPI and somewhat better information about the world economy.”
And at this meeting:
“The information on labour costs and softening labour market conditions suggested that the inflation outlook still afforded the Board some scope to provide additional support to demand. Further confirmation that the peak in resource sector investment was near, and that the short-term outlook for non-resource investment remained subdued, indicated that there was a case for the Board to provide that support. The Board considered whether to respond to this case in the near term or wait for further information. On balance, members saw merit in reducing the cash rate at this meeting.”
So it was December or some time in 2013, meaning not till at least February. Since the December meeting, the Fed has announced what amounts to QE4 and a proponent of money printing at all costs now leads one of Australia's other big trading partners – Japan. The ECB is yet to let fly.
A strong Aussie is here to stay. The next quarterly CPI report, due in April, will be interesting. All things being equal, there seems little chance of another rate cut before then.
Read the full minutes here.
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