Australia | Dec 15 2009
By Greg Peel
The Reserve Bank of Australia has this week launched a swanky new website, and it appears the central bank’s approach to published minutes of its monetary policy committee meetings has changed a bit as well. This month the Board really opened its heart.
First up, having been saying much the same thing for a few months now, the minutes opened with a bullet-point summary of that which has not changed. Australian economic growth in 2009 has turned out much better than expected when the cash rate was hastily dropped to 3%. Led by resource sector investment, the outlook for sustained growth also looks good despite the waning effects of fiscal stimulus. Inflation will moderate but not fall as far as first thought. Housing credit continues to expand while business credit conditions are showing tentative signs of improvement.
These reasons are why we moved to 3.5% over October and November. The question for the Board was thus, do we go again in December?
The minutes suggest such a decision was not taken lightly. There must have been a lot of worn carpet and a lot of gnawed-off finger nails as members agonised. On the one hand, even after taking into account the two previous hikes, “most lending rates were still noticeably below normal”. If the economy kept going the way it was going, “monetary policy would need to be adjusted further over time to lessen the degree of stimulus”, not in an attempt to actually slow growth, but to keep “the stance of policy appropriate for improving economic conditions”.
But gosh, after two hikes, might it not be appropriate to hold back and see what indications new data brought? One step too far could shatter confidence, ongoing international uncertainty was still a factor, and the rampant Aussie was already acting as a dampener. But on the other hand, the years ahead will feature long-run upward pressures on the economy from housing demand, infrastructure investment and resources sector investment. Hence “the approach of lowering rates very quickly [from 7.25% to 3%] in response to the threat of serious economic weakness needed to be accompanied by a timely removal of at least some of that stimulus once the threat had passed”, or otherwise interest rates would “end up being too low for an extended period”.
Note “at least some of”.
The Board, as we know, voted to go again to 3.75%. If a “normal” rate is 5%, how much is “at least some of”. The arguments were “finely balanced” and…and this is the important part… [my emphasis]:
“Members saw this adjustment, together with those in the proceeding two meetings, as materially shifting the stance of policy to a less accommodative setting and, therefore, as increasing the flexibility available to the Board at future meetings.”
The minutes did not say “gradually lessen monetary policy” this time. The hint here is that the “finely balanced” decision to go again in December meant the RBA would probably stall in February just on principle. This is the “flexibility” the Board has after a “material” adjustment to date. On these minutes alone I’d be tipping no rate rise in February.
But…
The RBA is merely flexible, not pre-decided. Since the early December meeting, unemployment has fallen to 5.7%. US economic data have shown signs of improvement and the Aussie has stalled in its rally. China has posted another positive month of data. And tomorrow we will learn Australia’s third quarter GDP growth.
And Governor Stevens has also spoken since the meeting, once again delivering an upbeat assessment which led reporters to believe a February rate rise is in the bag. Indeed, all and sundry have now decided the unemployment number alone is enough to guarantee a Feb rate rise.
Yet there’s a couple of other factors. Yesterday’s private credit numbers were weak, suggesting lending, particularly for businesses, is still tight. However, the RBA has often pointed out that fresh equity issues for listed stocks has offset the need to see much improved business lending numbers.
And then there’s a small matter of bank mortgage rate increases. Most banks raised by more than the RBA, with Westpac the winner at 45bps. The RBA has noted in the past that if banks raise their own lending rates, it alleviates some need for the central bank to force more hikes upon them.
Westpac has been publicly horse-whipped for its seeming outrageous excess, but once you dismiss politicians as being politicians and the mainstream media as sensationalists, what was largely overlooked was that Westpac also lifted its deposit rate above market. Given Westpac and CBA control just under 50% of all Australian mortgages now, clearly there is not so much of a need to be as competitive. Westpac can afford to diversify some risk away in housing and let smaller ANZ and NAB pick up a bit of the excess. And on the flipside, Westpac can bolster its tier one capital further with the best capital of all – deposits – by becoming competitive on the other side of the ledger.
So okay, mortgagees lose out and its nigh on impossible to change banks. But depositors win, so why Westpac had to carry on with some ridiculous “banana smoothie” campaign is anyone’s guess.
But back to the task at hand. Despite the unemployment rate fall this month, I suggest it’s too early to be quite certain on what the RBA will do in February. I, for one, do not wish to spoil my perfect 2009 record by being hasty. This time we have two months to consider, and despite a bit of a summer hiatus there’s still plenty of data to come, both here and abroad.