Australia | Sep 15 2009
By Greg Peel
“At the previous meeting, members had agreed that if the economy continued to evolve as in the latest forecasts, the Bank would in due course need to adopt a less expansionary policy stance. The information at this meeting suggested that economic conditions were indeed evolving broadly in that way. Nonetheless, some uncertainty remained about the outlook both abroad and at home.”
This one paragraph, appearing in the conclusion of the minutes of the September monetary policy meeting two weeks ago, sums up the Reserve Bank of Australia’s current thinking.
If one was to take the first two sentences only, one would assume the first move into a tightening cycle would be in October with a teaser of 0.25%. However, the Board is as yet uncertain, suggesting it might want a bit more economic data on the table before raising rates. At the time of the meeting, the RBA had not yet learnt the second quarter GDP result, but had assumed, correctly, a small positive. So this in itself is not enough to tip the balance.
The RBA also noted recent Australian economic data had been mostly positive, particularly in the form of sentiment measures and business investment intentions. On the flipside, credit markets remained tighter in the post-GFC regime and household budgets remained under strain, the Board noted. But it also acknowledged a spending rush in late June to make use of tax credits offered by the government, which highlights one major dilemma the RBA is facing, being: why is the economy relatively strong?
“Members noted that it was hard to disentangle the contribution that Asian demand, fiscal stimulus and easier monetary policy had each made to the better-than-expected outcomes.”
In other words, is Australia’s economy performing well because (a) Chinese commodity buying is supporting the trade balance; (b) the Rudd government’s stimulus packages are very supportive; or (c) the RBA cash rate has been at a historically low 3% since April?
If the answer is (c), then it’s time to raise rates. The historically low 3% level was always declared by Glenn Stevens, after all, to be only an “emergency” rate. If easy monetary policy is having the effect of stimulating the economy into surprisingly robust growth under the circumstances, then clearly there is no longer an emergency.
If the answer is (a), then the risk is that China’s aggressive commodity buying in the first half ’09 was mostly about stockpiling at lower prices than it was about immediate demand for infrastructure projects, and hence at some point China would pull on the reins. No point in raising rates too quickly under that scenario. If the answer is (b) then the risk is the upcoming expiry or winding down of particularly the consumer-targeted fiscal policies would lead to a domestic demand vacuum, and again it would be foolish to raise rates in such a period.
The correct answer is of course (d) all of the above. But that only makes the picture less distinct.
The Board also reiterated its acknowledgement that inflation was not falling as significantly as previously thought, and would not likely reach the expected bottom-of-the-comfort-zone level of 2%. Were deflationary effects of weak demand and tight credit still a significant factor, the RBA would not be looking to raise rates at all. But this is not the case, so the window is open. But were the RBA to raise to avoid inflation running away again, it risks stifling Australia’s relatively good economic performance to date:
“As at the previous meeting, members noted that the policy decision in the near term involved balancing the risk of over staying an accommodative stance, and that of prematurely tightening and adversely affecting confidence and demand.”
Hence the RBA has a lot of balls to juggle, and given we have just come through what was meant to be the most disastrous economic calamity of most of our lifetimes it would be best to continue erring on the side of caution. Thus:
“The meeting concluded that the balance was best struck by leaving the cash rate unchanged for the time being, pending further evaluation of incoming information at future meetings.”
Notably, the minutes of the meeting do not come across as being quite as “hawkish” as Glenn Stevens’ specific statement accompanying this month’s “on hold” decision. In his brief explanation, he used the words “adjust monetary policy” for the first time since the long period in which “monitor monetary policy” was the mantra. This was enough for me at least to assume he was preparing us for an October raise. However, not only are the minutes suggesting a more cautious stance, economic data released since the meeting have been mixed.
This is enough to suggest there will not be a rate rise in October, but then November cannot be ruled out. Some economists are leaning towards December given expectations the waning effect of stimulus will ensure a possibly negative GDP result in the September quarter. But even that would not be an “emergency”. Still other economists believe everyone’s mad, and there will not be a rate rise until at least February or later. Obviously we just have to keep evaluating subsequent data readings.
Something which can be noted, however, is that October is not a month the RBA usually likes to make policy changes in. Aside from this time last year when the central bank was in aggressive post-Lehman cutting mode, you have to go back to 2001 and then 1990 to find an October rate change.