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Three keys to unlocking rates puzzle


RESERVE Bank governor Glenn Stevens said it last month; and just in case you didn’t hear or believe him, he said it again yesterday.

The RBA’s official interest rate is on hold for some and perhaps many months. The exact words he used — and they were exactly the same last month and this — were: “a period of stability in interest rates.”

That didn’t stop the economentariat from seeking deep clues in the RBA’s statement, to tell them — so they could tell you — what he REALLY meant.

They “found” essentially two — one in what he did say this month and didn’t last month; and one in what he didn’t say this month and did last month.

This month he said “the exchange rate remains high by historical standards”. Last month, he’d merely noted “the exchange rate has declined further”. So, hint, hint, he’s back to trying to “jawbone (down)” the Aussie.

In contrast, whereas last month he had said that the RBA “expects growth to remain below trend for a time yet”, that was missing from this month’s statement, replaced by a more upbeat “over time, growth is expected to strengthen”.

The problem is that the two “clues” pull in opposite directions.

The first would suggest that the RBA wanted a lower Aussie, as that’s needed to boost growth — and, stretching it out, that if we and it didn’t get it, further rate cuts might come back onto the agenda.

The second would suggest that the RBA now believed we might get growth closer to trend and get it quicker; therefore the next rate change was more likely to be an increase than a cut.

The holistic answer to all that deep speculation is two words: the Ukraine. A month ago, far less three months ago, who was predicting that the Ukraine could destabilise global financial markets and potentially force a reassessment of policy around the world.

I’m not suggesting that we are now necessarily teetering on the edge of another precipice. But rather to make the point, that the best laid plans of mice, men — and Reserve Bankers — are hostage to “events”. In particular, to those from out of left field.

Or as Zhou Enlai said: “it’s too early to tell.” He was talking about the significance of “recent” events in Paris — although whether in 1789 or just back in 1968, is a matter of interesting conjecture.

Whatever, I’m borrowing the quote on behalf of Stevens, in respect of which direction the next rate move, when it comes, will be. That is to say, I doubt that he has the faintest idea.

The changed words from February’s statement to March’s were about something far more modest; they were all about context, not about sending subtle hints about the “next rate change”.

February was about explaining and contextualising a shift in policy. The RBA was shifting from its previous stance of mild ease to one of neutrality.

In the context of that and slightly disturbing — or “challenging” — December quarter inflation figures, the RBA wanted to make it very clear it was ruling out not just further rate cuts, but any suggestion of rate rises.

Hence, the avoidance of any explicit reference to the Aussie being “too high”, which might have suggested a rate cut was still possible; but equally the specific reference to the forecast of below trend growth, to rule out any speculation of a hike.

This month, as the RBA was merely repeating its policy stance, it was more relaxed about noting relevant dynamics — both the high (but still relatively lower) dollar; and strengthening (but still not rocketing) growth.

But at core nothing has changed — either from the policy stance initiated a month ago or the forecasts of (gradually strengthening) growth and (marginally moderating highish) inflation that it was founded on.

In this context, the three sets of statistics — released yesterday, today and tomorrow (well, actually, next Thursday) are critical. Both in telling us what is happening, but also how they play into the RBA’s perceptions.

Yesterday the trade data showed that net exports on their own would add 0.6 per cent to GDP growth in the December quarter — with those GDP figures to surface today.

That would double the contribution of net exports to growth compared to the December quarter a year ago when we got an overall growth rate of 0.5 per cent; and could push annual growth over 2.5 per cent.

Two points. We will find out today — there are just too many variables to try to predict the number.

But more importantly, today’s GDP figure is about yesterday — the December quarter. The RBA bases its rates policy on where tomorrow’s growth is headed.

The big factor in that is the coming fall in resources construction. The RBA is actually being “optimistic” to believe that growth elsewhere in the economy will offset that enough to bring overall growth back closer to trend.

Next week we get the monthly jobs numbers. They are a critical part of the RBA’s two-tier balancing act. First in assessing where the economy might be headed; and then how they play into the RBA’s rate rhetoric.

It’s tried to walk a delicate line between predicting deteriorating jobs and the resources investment cliff (or slope), into a still-strengthening overall economy.

It is that line which essentially gets you to steady rates. At least, while it’s still “to early to tell”.

Posted by Terry McCann - Herald Sun on 5th March, 2014 | Comments | Trackbacks
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