RBA March Board Meeting.

A further pause for a month or two is a real possibility.

Preface

This month's outlook for the RBA March meeting contains more quotes from the RBA statements then usual. Governor Glenn Stevens attended a Committee hearing in Canberra and the Minutes from the February RBA board meeting reveal the latest thoughts from officials on the transmission of monetary policy in the current tightening phase. Deputy Governor Ric Battellino delivered a paper on Mining Booms and the Australian Economy, and all were referenced in preparing this report.

The RBA have concluded the first phase of the current tightening cycle, having tightened 0.75% in three back to back moves at successive meetings in October, November and December 2009.

Governor Glen Stevens at the recent hearing of the Standing Committee on Economics replied to a question from the chair:

Mr. Stevens – The way I would characterise it is that I do not think we are in emergency anymore; I think we have done enough to lift off that. I would say that if you looked at the borrowing rates being actually paid on average by both business and housing borrowers, they are still below what I would call an average for the past decade or so; they are probably 50 and 100 points below the average or something like that. So we are fair bit closer to normal now than we were when we last met with you, given what we have done and what the banks added on top of that. When we eventually get to normal, there is a bit more work to do there but I think that is the order of magnitude we are talking about.

 Source http://www.aph.gov.au/Hansard/resps/committee/R12597.pdf

Hansard.ECO5. 

The current tightening phase commenced in October 2009, and is clearly still in progress. given the assertion below from the February Monetary Policy Statement, and repeated in part, in the opening preamble from the Chair at the Committee hearing in Canberra.

If economic conditions evolve broadly as expected, the Board considers it likely that monetary policy will, over time, need to be adjusted further in order to ensure that inflation remains consistent with the target over the medium term.

Source: Statement by Glenn Stevens: Monetary Policy Decision. 2 February 2010.

There is a broad acceptance that rates will rise further during 2010, with the year end estimates around 4.5% or three more hikes of 0.25% and Glenn Stevens suggesting borrowing rates are probably 50 to 100 points below average.

Reasons why the RBA Board could again pause at the February meeting include.

• Data since that meeting has not been extremely strong: Employment data was positive and the unemployment rate fell from 5.5% to 5.3%. That is a good outcome, but falling unemployment in a favourable economic situation currently. More importantly, the Wage Cost Index, a key item on the RBA check list, fell from 3.6% to 2.9%, and there are no inflationary pressures from that outcome.
• One area of strength is Private Capital Expenditure (Capex) data, released yesterday, which rose 5.5% in 4 Q. Strength in the resource sector investment and investment intentions, was highlighted in a speech by Deputy Governor Ric Battellino earlier this week titled ‘Mining Booms and the Australian Economy’. http://www.rba.gov.au/speeches/2010/sp-dg-230210.html However, as the very big 2009 Western Australians gas boom has not reached the output stage, monetary policy may not yet be needed in this area of the economy.
• So as far as the Domestic Economic picture is concerned, nothing much has really changed, so why should the RBA alter their chosen short term view? To hike in December, pause in February, and hike again in March could send conflicting signals. To pause and then pause again for similar reasons would not be criticized.
• Sure, another month has passed allowing further evaluation of the effects of the ‘three plus one’ rate hikes. However there are ten more RBA board meetings this year and say, four more rate hikes of 25 points this year, so it makes sense to space them apart a little.

Detailed below are the dates and changes of the previous tightening cycle, which was the longest since 1990, the extent of RBA website details, and in effect, modern monetary policy. Note that after nearby rate hikes a reasonable period of pause followers.

The rapid rate hikes in 2009 had a purpose, but the next phase could see the RBA return to a more normal pattern.

5 Mar 2008 +0.25 7.25

6 Feb 2008 +0.25 7.00

7 Nov 2007 +0.25 6.75

8 Aug 2007 +0.25 6.50

8 Nov 2006 +0.25 6.25

2 Aug 2006 +0.25 6.00

3 May 2006 +0.25 5.75

2 Mar 2005 +0.25 5.50

3 Dec 2003 +0.25 5.25

5 Nov 2003 +0.25 5.00

5 Jun 2002 +0.25 4.75

8 May 2002 +0.25 4.50

 Source. http://www.rba.gov.au/statistics/cash-rate.html

The final consideration in leaving the cash rate unchanged next week may be soundings by Rating agencies that the sovereign debt rating of Greece may be cut , which has weakened both the Euro and global equity markets in the past 24 hours. There are fears that sovereign debt issues will spread further throughout Europe, sufficient to cause another pause.

Governor Stevens opened his address last week at the Senate Committee and spoke of two challenges

·         The two speed nature of the global upswing.

·         The increasing focus on sovereign creditworthiness.

The second challenge internationally is the increasing focus on sovereign creditworthiness. We saw a brief period of turmoil regarding Dubai late last year, and more recently the public finances of Greece have been under the spotlight, with those of a few other European countries just in the background. Going beyond just those instances, government balance sheets in numerous countries have taken on considerable burdens as a result of the crisis, and markets are beginning to focus on issues of sustainability. It will be a very delicate balancing act for those countries to strengthen their fiscal positions without of course undermining the strength of the economic upswing they are seeing.

Source: Hansard, ECO 2.

Selected points of summary from the 2 February RBA Board minutes. 

These minutes provide further support to a further pause, in my view.

Source: http://www.rba.gov.au/monetary-policy/rba-board-minutes/2010/02022010.html

(My emphasis in bold)

As at the previous meeting, members considered the policy considerations to be finely balanced. Members expected that, if economic conditions continued to improve as expected, further increases in the cash rate were likely to be necessary. But they did not regard that outlook as requiring an increase at every meeting, and they saw the earlier moves to begin withdrawing monetary stimulus promptly as affording the Road a degree of flexibility in its subsequent decisions. This allowed the possibility of waiting to receive some more information on how the economy was responding to the monetary tightening that had already occurred. Such a course would also allow time to monitor events overseas.

Members noted that many market participants expected a further increase in the cash rate at this meeting. They concluded that, on balance, the stronger case was to leave the cash rate unchanged for the time being…….

Source: Minutes of 2 Feb meeting RBA Board.

Considerations for Monetary Policy. Para 3 and 4 (in part).

Summary

We are fortunate to currently have an independently minded RBA Board, so it can be safely assumed that the decision will be as the Board sees it on the day.

In my view there has not been any significant developments to advance monetary policy toward a more normal or average setting, other than the passing of another month. Perhaps the stronger case to leave rates unchanged is still the stronger case.

With kind regards,