Australia | Jun 16 2011
By Greg Peel
As I noted in my report earlier this month on the RBA's June monetary policy statement, the following paragraph from the May statement, which had many economists suddenly expecting a June rate rise, was gone in the June statement:
“Looking through these short-term movements, however, the recent information suggests that the marked decline in underlying inflation from the peak in 2008 has now run its course. While the rising exchange rate will be helping to hold down prices for some consumer products over the coming few quarters, over the longer term inflation can be expected to increase somewhat if economic conditions evolve broadly as expected.”
Instead, we were back to “the current restrictive stance of monetary policy remains appropriate” and an ongoing “careful assessment” of the outlook.
While many economists had stuck to, and continue to stick to, expectation of an August rate rise, the omission of the above statement had some in the market questioning as to whether even August was the right bet. A weak round of March quarter data, culminating in the GDP result, appeared to have forced quite an RBA back-down from its hawkish stance in May.
Yesterday RBA governor Glenn Stevens had the chance to qualify the central bank's fresh stance in a speech delivered to the Economic Society of Australia in Brisbane. As it turns out, the stance is not really fresh at all. Despite the omission of the above paragraph from the June statement, Stevens' view seemed no less hawkish. The central bank will assess the data month on month, Stevens suggested, but importantly the emphasis would be on the June quarter CPI data.
All along, the August school has assumed the June quarter CPI result, due in July, would be the confirmation the RBA required in order to raise. It appears this assumption has always been the right one.
The RBA might be assessing the situation “month on month”, meaning from policy meeting to policy meeting, but as ANZ notes, Stevens did not address some of the weak high frequency data we've seen lately in his speech. The media noted yesterday, for example, that Stevens dismissed the weak Westpac consumer confidence survey as immaterial in the wider scheme. Instead, Stevens suggested that recent weakness, as evidenced by the “two-speed economy”, is evidence that long term structural change is required in the Australian economy.
To ANZ, this means the RBA does not believe we are in a mid-cycle slowdown that the central bank needs to account for. Rather, Australia's twenty-first century economy has evolved given exogenous influences and hence there's little point in trying to hang on to the past. Adapt or fail, seems to be the message.
There have been various arguments thrown up by economists, commentators and particularly politicians as to why the RBA should not tighten monetary policy simply on the basis of the mining boom alone. Yesterday Stevens addressed and dismissed those arguments.
Stevens noted that the mining boom is not isolated to miners. The benefits of the boom flow through to service companies (utilities, transport and business services) and sector earnings flow through to shareholder wealth, including superannuation. Stevens is very much of the “stronger for longer” school of commodity price forecasters, implicit in his suggestion that higher prices are a “manifestation of of a large and persistent change”.
Australia's manufacturing industry, Stevens noted, has been in decline since the 1950s. There's no point whingeing and no point fighting the inevitable, one might take his statement to suggest. And the rise of internet retail was bound to happen.
While much has been made of the impact on every sector of the economy from the strong currency, Stevens argued that were the currency to be much weaker the wider economy (ex-mining) would not be stronger. The competition of growth would simply be different. Households would be worse off because they'd have no buffer against the high cost of food and energy.
(This is an interesting argument, given one assumes that for the Aussie to be weaker commodity prices would have to be weaker. It's difficult to perceive of a scenario which would provide high commodity prices and a weaker currency.)
On the subject of the now apparently weak housing market, Stevens (who has previously been concerned about a housing market bubble and has directed RBA policy accordingly) pointed out that house prices in Australia are simply tracking population flows. Brisbane and Perth previously saw the highest rate of population growth and as such the biggest jump in house prices, for example, but the two cities are now seeing the biggest population decline and hence house prices have fallen.
ANZ's take on Stevens' speech is that a core inflation increase of 0.7% in the June quarter would be enough to ensure an August rate rise. The bank's forecast for the June quarter core CPI is 0.7%.
We should thus scoot over July without any change in policy. Even if there are some weak monthly data beforehand, it seems inflation is the all important factor. Unlike the US, UK, Europe, Japan and China, Australia does not issue official inflation data monthly, only quarterly. We do however have the TD Securities monthly inflation gauge to go by which, although not “official”, should provide us with the hints we need leading into the August RBA meeting.
