Australia | Jan 25 2012
By Greg Peel
The ABC's Alan Kohler noted last week that 20 of 21 economists surveyed were expecting the RBA to cut rates again next month following cuts in November and December. When economists line up like ducks they usually get shot and the kewpie doll would go to Mr 21, but the argument is fairly straight forward if you look at the moribund Australian consumer sector, the stubborn Aussie, jobs been lost left right and centre in manufacturing, and the ongoing risk in Europe. Throw in expectations of a low December quarter CPI result and one might wonder if the RBA actually had any choice.
As it was, the headline CPI came in with 0% growth when 0.2% was expected. Last piece of the puzzle, one might say. The popular media will all be screaming “rate cut coming” tonight on the news but only because after all these years the cretins still don't understand that the RBA pays no attention to headline inflation.
The RBA looks only at “core” inflation, measured as the average of the trimmed mean and the weighted median. It's the sort of stuff to have statisticians salivating and normal people scratching their heads but suffice to say the result was 0.55% growth, which is a lot more than flat but still below expectation. Further number crunching provides an annualised core rate of 2.6% which…drum roll…is actually higher than the RBA's forecast for the period of 2.5%.
In other words, inflation is higher than the central bank expected.
Does that mean the RBA won't cut? Well, the trend still remains in a southerly direction. Breaking the annual core rate down to a six-month rate each quarter, ANZ's economists find the numbers running from 3.6% in the June quarter down to 1.9% in the December quarter. Remember that the RBA's annual target rate is 2-3%. Were Australia's economy straightforward, then you'd have to say a rate cut seems obvious.
But Australia's economy is not straightforward. Of all the tales of economic woe listed above, the flipside is resource sector economy which has finally begun to accelerate its long expected ramp-up. The resource sector does not just mean the miners and oil & gas drillers themselves, but all the engineering and construction service companies, the equipment manufacturing and hire businesses, the providers of accommodation, flights, beers and whatever else in remote WA and Queensland, and whomever is the recipient of the bucket loads of cash handed to mining employees every week.
The RBA shifted monetary policy in November from a mildly restrictive stance to a more neutral stance, while the December cut was more to do with the threat looming in Europe (the threat the World Bank and IMF, among others, have just cottoned on to). That threat is still very much real, but no one seems to care anymore. There seems to be a feeling in markets that (a) Europe is finally bumbling towards resolution and (b) even if not, we've all had time now to rearrange our affairs accordingly.
Does the RBA thus need to be any more accommodative? The ANZ economists are beginning to think not. They still have a rate cut pencilled in but suggest it's become a bit of a toss up. Recent Australian data have been “modest but not disastrous,” they note. Perhaps the RBA would do better to take a breather.
NAB suggests the February meeting will involve some interesting discussion. The board will need to assess the downside inflation risks from this lower base and as to whether they've “taken out enough insurance” against global uncertainty. At this stage NAB believes there is still some room to move again.
The Aussie is an interesting case in point. The US dollar index has recently been back at 80, while the Aussie has persistently remained well above parity. The last time the US dollar index was at 80 was in mid-2010, at which point the Aussie was back in the eighties. Despite some renewed strength in commodity prices of late, it appears as if the Aussie has become immune to the greenback.
It hasn't of course. The world tends to measure the US dollar in terms of its trade-weighted index while the “Aussie” is always the rate against the US dollar. The Aussie is not part of the US dollar index (euro, yen, pound, kroner, Canadian) and that index has risen steeply as the euro has fallen, pushing the AUD/EUR to ridiculous levels but, on relativities, keeping the AUD/USD elevated.
At this rate a standard BMW sedan will soon be cheaper in Australia than a Commodore, duty notwithstanding, which about sums up the Australian car industry and manufacturing per se. Would a rate cut help? No.
Real estate agents report not a lot of increased demand from buyers since last year's two rate cuts. Will another one make any difference ? No. Will another rate cut send Aussie consumers rushing off to Hardly Normal? No. They're still hellbent on reducing credit card debts.
And last year ANZ Bank was the first bank to publicly point out that mortgage rates really bear no relationship to the RBA cash rate so it's time SVRs were pegged based on realistic funding costs. The other banks will no doubt follow suit. CBA recently issued the first offering of covered bonds under the new system – a lot of them – and analysts are concerned that not only might CBA have sucked up all the buyers, the rate achieved was a bit higher than hoped. So – would another RBA cut have an impact on mortgage rates? Probably not.
The only other consideration is that the strong Aussie is more directly a result of carry trade inflows all intent on picking up solid Aussie bond yields compared to the rubbish available in the likes of the US, UK, Germany and Japan. The RBA could cut to stymie the punters, although it's not normally the RBA way (unlike the Bank of Japan for example, or Swiss Bank).
So at this stage the summation has to be that a rate cut may yet be forthcoming on February 7 but it's not the given most expect.
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