Australia | Feb 03 2010
By Andrew Nelson
Despite a two-month break since the last RBA Board meeting and a preponderance of domestic data that pretty much show the economy is continuing to gather momentum, Australia’s central bank surprised almost everyone by keeping the cash rate target at 3.75% at its February board meeting.
The news had analysts and economists nation wide scrambling to explain and reset their views going forward. FNArena has taken a quick look though the commentary from most of Australia’s leading stockbrokers in order to build a snap shot of market reactions.
Merrill Lynch Economist John Rothfield sums up the consensus fairly well in saying that the significant differences between the last decision and this one were comments about still-difficult credit conditions for small businesses, plus the fact that the bulk of the lending fraternity had already raised their key lending rates by about 25bps more than the current cash target.
Recent news about Australian retail price wars, a surprise drop in January job ads and maybe even a weekend plunge in the government’s popularity, he cheekily adds, could also have been factored in the decision.
Rothfield also points out a pretty big elephant in the room, the fact that the stock market and commodity prices have started to go backwards. While history does show that the RBA isn’t timid about raising rates when stocks are falling, when you factor in China’s recent tightening measure, Rothfield thinks the RBA may well be seeing a less certain outlook for a gradual recovery in Australian commodity export prices and hence terms of trade. This has Rothfield thinking that the board felt it was in a position where it could wait to see what happens next.
There is also the quite commonly held view that the RBA has a heads up on December partial indicators that are due to be released later this week. All up, Rothfield viewed yesterday’s decision as being more about a short term increase in the risks around central economic forecasts, rather than a downgrade in overall policy. BA-Merrill Lynch has kept its call for a 4.75% cash target by the end of 2010, but is now unprepared to predict the next 25bp cut other than saying it will either be in March or April, with the data flow over the next three days likely to be material in the eventual decision.
Economists at RBS were even more surprised at the RBA’s decision, even after a read through of the accompanying statement, given the central bank seemed to remain very upbeat about the economic recovery. For example, the team cites the RBA’s expectation that global growth would be close to trend pace in 2010 and 2011, although the broker does admit there were hints of concern about China’s push to start normalising policy and market concerns about increasing sovereign risk.
Yet RBS is in agreement with Merrills in thinking that the RBA’s main motive was to sit back and have a look at what the last three rises will bring about. And maybe, thinks the team from RBS, the central bank wanted to get people out of the habit of believing the bank would simply keep hiking every month. Given the latest curve ball, the broker is cautious in making finite predictions about the RBA’s next move. That said, the team from RBS’ money is on another 25bp hike in March.
There was a bit of doubletalk from the economists at UBS, who on one hand called the move surprising, yet on the other hand say the decision was broadly consistent with their view, just one month earlier than they had expected. With the team expecting a pull-back in retail sales, a slow down in housing lending post the first time home buyers grant, weak Q4 wages later in the month and a sub-trend GDP read for Q4, they have wisely stayed out of the next hike prediction pool.
Echoing pretty much everyone else that has made a comment, the broker thinks that Friday’s quarterly Statement on Monetary Policy will provide a much clearer picture on the extent of the upgrade to growth, and whether or not the RBA will also lift its inflation forecast against the backdrop of not raising rates yesterday.
Economists at GSJB Were were prepared to take it on the chin, admitting they had no idea this move was coming and in fact say the text accompanying the decision reads more like an argument for higher rates than a case for a pause. The rest from Weres reads pretty much like what we’ve already covered; the RBA opted to hold steady this month because of the move by domestic banks to pass on additional tightening in December. And the RBA wanted to wait and see the reaction in the economic data to the tightening that has already been delivered.
But the team from Weres thinks the RBA might have shot itself in the foot a little in choosing to pause when rates are still clearly well below a neutral setting. Why? Because the team thinks the RBA will now find it difficult to move back to successive monthly rate hikes without significant positive economic data surprises. As such, the team is predicting a more gradual restoration of neutral settings, with the RBA allowing 2-3 months to assess the impact of each 25bp rate hike before moving again. Ultimately, GSJB Were expects a 25bp rate hike in each quarter of 2010, taking the cash rate to 4.75% by end-2010.
Citi diverges a bit in its view, believing recent global developments appear to be one of the deciding factors. The team notes that the RBA cited attempts by the Chinese authorities to reduce policy stimulus and also made some concerned comments about the increasing risk in some sovereigns. Given previous RBA bullishness towards China, Citi thinks the bank may be a little concerned about the regional impacts from China’s recent policy decisions. Again, Friday will tell. But at this point, Citi predicts no rate increase in March, with a year end cash rate at 5.00%, rather than its previous call for 5.25%.
Macquarie is in the other camp, the one that believes the key reason behind the decision to pause in February is that the Reserve Bank is looking to take a step back and assess the impact of its previous 75bps of tightening in the final months of last year. The broker very much expects to see further rate hikes over 2010 and predicts the next 25bp increase in the cash rate will happen in March. However, Macquarie does admit that further tightening will probably be more gradual than it was previously expecting.
The last broker we cover is Morgan Stanley and comments from its economist Gerard Minack, who instead of getting all complicated about motives simply believes that the RBA made an “admirably” pre-emptive decision and has thus removed much of the unwanted stimulus. While he admits there will likely be one or two more rate increases coming, Minack believes that policy will be kept on hold through the second half of 2010. Otherwise, he thinks it is too soon to have a strong view on how much higher rates may go beyond that, but he predicts the key swing factors will be global growth and domestic labour costs.