Australia | Jun 01 2010
By Greg Peel
The RBA's June statement of monetary policy, released this afternoon, is not only a lot briefer than May's but decidedly different to otherwise very similar statements of the past few months.
There are two reasons for this. Firstly, in May the RBA all but signalled the end of its monetary policy tightening phase which began in October and saw the cash rate return from the “emergency” level of 3% to a more “average” level of 4.5%, where it remained today. The second is that while Europe scored a passing mention in May, this month's statement is almost all about Europe.
In early May, markets had become nervous but Europe had not yet reached crisis levels. There has since been “a good deal more caution,” the RBA notes, and equity prices, commodity prices and the Aussie have fallen while safe haven bond yields have also fallen. Nevertheless, the RBA notes commodity prices “remain at very high levels”.
This is important.
The RBA acknowledges the rescue packages being assembled in Europe and suggests the effect of those is yet to be determined. But in the meantime, while the European economy may weaken, growth in North America is becoming more established and in Asia growth is quite strong, Glenn Stevens suggests. Indeed, Asian growth may “need” to moderate, says Stevens.
Everyone else is currently worried that it “will” moderate.
So all up the RBA is not overly concerned about Europe, and has once again notes the strong terms of trade (those commodity prices), an economy growing ahead of trend, and inflation which is expected to be toward the top of the comfort zone in FY11.
It almost sounds like a statement arguing for a rate rise, rather than not. But then the RBA had already hinted it was done for now and was content to just sit back and watch for a while. Borrowing rates are now back to average levels after “significant” adjustment, the bank reiterates. Monetary policy is appropriate “for the near term”.
If the RBA is looking to determine the ongoing trends from recent economic data releases, then it may just end up confused. Today's data were a very mixed bag.
The May AiG performance of manufacturing index fell to 56.3 from 59.8 in April. While this number was not surprising given the steadily growing impact of recent rate hikes, any level above 50 indicates the manufacturing sector is still expanding in the month and the rate of expansion in April was the strongest in eight years.
More surprising was April's retail sales number, which showed growth of 0.6% compared to economist consensus expectation of 0.3%. If anything, evidence suggests consumer demand is slowing. But it was all about food, which averages 40% of household spending. Food retail rose by 1.3% compared to only a 0.1% rise in non-food spending and could thus suggest a return to cooking more meal at home again now that market nervousness has returned.
The previous retail sales reading for March was also revised up from 0.3% growth to 0.8% growth, which followed the shock 1.2% fall in February. The moral to the economic story is of course to ignore the monthly movements and just follow the trend. Westpac notes the trend of retail sales growth remains “decidedly subdued” at 0.1% per month.
There was nevertheless nothing subdued about April's building approvals numbers. Economists had expected a 5% decline in approvals as interest rates continue to bite, but instead they plunged 14.8%.
Building approval numbers are the precursor to later housing start numbers, themselves indicative of economic activity. They are notoriously volatile (March's number was revised up from 15.3% growth to 16.8%) growth largely because approvals or otherwise for whole apartment blocks have a considerable monetary impact whilst being more sporadic. The component trend in single house approvals is usually a less volatile and more reliable indicator. But this is what has economists perplexed.
Private sector house approvals dropped a “startling” 13.5% in April, to use the Westpac economist's words. Other words bandied about were “staggering” and “whopping”. Numbers like these have not been seen since the month GST was first introduced.
Westpac is nevertheless a bit sceptical, and advises caution. With Victoria in particular distorting other state numbers with a 23.8% drop, it is quite possible the numbers reflect tardy returns to local councils from whom the data is collected, rather than a significant shift in trend.
With the RBA now in a holding pattern for a least a couple of months, we can await more data releases from which to determine more accurate trends.
Read the full RBA statement here.
