Australia | Feb 20 2009
By Greg Peel
The governor and board of the Reserve Bank of Australia are obliged to provide testimony to the lower house once every six months, to keep the pollies up to speed with all things economic. The governor releases his speech to the media beforehand. As I write, shadow treasurer newbie Joe Hockey is still asking the RBA to explain a few things to him, such as how the US can seemingly just print money at will.
Glenn Stevens noted in his testimony that his previous visit to Canberra was before the fall of Lehman Bros, so things have changed a little. Indeed, the fall “triggered a massive re-appraisal of risk and ushered in a period of the most intense financial turmoil seen in decades”.
Stevens believes that the extraordinary responses of policy-makers and central banks around the world to counter the crisis have helped to stabilise “what could otherwise have been a catastrophic loss of confidence in the global financial system”. He does, however, suggest that such policies are still a “work in progress”. Nevertheless, there has been a large toll on business and consumer confidence, and this is being reflected in economic contraction.
The sudden turn for the worst forced the RBA to quickly shift from gradual monetary policy easing to aggressive policy easing – hence the 400 points of rate cut. Despite the aggression, “The deterioration in international economic conditions was so rapid,” Stevens notes, “that no policy response could prevent a period of near-term weakness in the Australian economy”.
And therein lies the crux of Stevens view – the words “near-term”. For Stevens maintains, as he has all along, that Australia was always much better-positioned than many other countries to ride out the economic storm. By comparison, and despite a rise in bad debts, our local banks are strong. Our corporate sector, on a net basis, is not too overly geared. We will not come out of this episode unscathed, Stevens warns, but we will be well placed to benefit when expansion returns.
And that, according to Stevens, is probably closer than people think, because “the long-run prospects for Australia have not deteriorated by as much as we may be feeling just now”.
In other words, the situation may look grim but it’s always darkest just before the dawn yadda yadda. Stevens maintains great faith in China, and also in Australia’s proven ability to adapt quickly to changed circumstances. The economy has been given a big boost by the RBA’s big cuts to the interest rate. While the worst of the slowdown is yet to show up in the data, neither has the full effect of the rate cuts been felt either, Stevens suggests.
“A very large easing of policy has been put in place, on the basis of the anticipated effects of the global downturn and more risk-averse behaviour at home. Those effects are yet to be seen in many of the figures, though they are being felt in businesses around the country. The effects of the policy adjustments are only beginning.”
So what this means is the RBA is cognisant that the impact of the cuts will not have fully shown up in the data yet. The risk is thus that more aggressive cutting might mean a swing too far in the other direction, which would ultimately prove inflationary.
“So in evaluating the information we receive in the months ahead, our task will be to distinguish between that which confirms the anticipated trends to which we have already responded, and that which tells us something genuinely new about the prospects for demand and prices over the medium term. Our objective, however, remains the same: sustainable growth and low inflation.”
The governor then begins to bang on for a while about ATMs.
The upshot of this testimony is that a March rate cut looks highly unlikely at present. Wayne Swan was no doubt disappointed in the testimony, given rate cuts go down really well with the electorate, but he would be pleased with the RBA’s view that while Australia will suffer a weak first half of 2009, the second half should begin to look brighter. Joe Hockey, on the other hand, just took notes.
Economists tend to agree that a rate cut is unlikely on March 3rd, which is only a week and a bit away, unless Bank of America suddenly went belly up or the Dow fell another 1000 points or something. Thereafter it will be a case of the RBA keeping a careful eye on just how the 400 points of relief are translating through to the real economy. There may not even be another cut at all, given the RBA believes it has now anticipated the worst with a 3.25% cash rate, rather than simply responded to an ongoing saga. If the second half of 2009 does see a recovery, then this might be the low in the cash rate already.
That would assume, of course, that nothing more untoward happens in global financial markets before now and then, and that’s a risky ask. In response to a question, Stevens suggested that he cared not if the money market was already factoring in a drop to 2% by mid-year. He will neither encourage nor discourage the market’s prediction. This clearly means there is scope yet for a fall to 2% should further economic shocks dictate, but Stevens doesn’t believe zero rates are of any help. Once you get too low, he noted, it makes little difference.