Well every single economist and media commentator got this decision wrong. Much like they failed to forecast the advent of the GFC and its surprisingly strong recovery (at least from an Antipodean perspective).
While I was a fierce critic of the RBA lifting rates directly and indirectly 6-7 times during the middle of the crisis, our central bank has exercised sublime judgment ever since.
Contrary to popular opinion, the RBA were way behind the eight-ball when they shifted monetary policy into reverse in September 2008. Recall that in August 2008 home loan rates peaked at an acerbic 9.6 per cent. The RBA has, however, been way ahead of the global game in managing the incipient recovery. This foresight has been ably assisted by their investment in a deep China capability, which enabled the RBA to presciently identify both the resilience of its economy and the far-reaching consequences for Australia before anyone else.
There is little doubt here that the RBA’s decision to temporarily pause – because, to be sure, interest rates are heading upwards – was influenced by the recent downward pressure the Chinese Government has exerted on credit creation. Indeed, the Governor notes as much in his pithy post-meeting statement, commenting, “Chinese authorities are now seeking to reduce the degree of stimulus to their economy.”
There are three other factors that likely motivated today’s outcome. First, the RBA has sensibly exercised the undervalued “option to wait” in recognition of the long and variable lags between changes in its overnight cash rate and real economic activity. In this regard, the Governor cautions, “Since information about the early impact of those changes is still limited, the Board judged it appropriate to hold a steady setting of monetary policy for the time being.”
Second, the RBA acknowledged that our banking oligarchs had done much of the hard work for them. It is ironic that the fall from grace that the once lionised Gail Kelly took in December effectively allows Glenn Stevens to look like a hero two months later. Here the Governor diplomatically notes that “[l]enders have generally raised rates a little more than the cash rate over recent months and most loan rates have risen by close to a percentage point.”
And recall that the RBA had already sent a shot or two across the banking oligarchs bows care of Ric Battelino’s recent speech in which he noted that their net interest margins today are about 20 basis points higher than they had been prior to the GFC (reminder to the latest banking apologist, Jennifer Hewett of The Australian, to do more homework).
Even the scapegoat that was residential mortgage margins are as high today as they were before the crisis according to the RBA’s latest analysis. This led Battelino to conclude that “With the economy and business climate now improving, the economic justification for wider margins on loans is becoming less compelling, so it would be reasonable to assume that, in a competitive banking sector, we should see margins level out soon.”
Finally, the Governor made very light work of the housing hysteria that has consumed the media of late by simply conceding that “dwelling prices have risen significantly over the past year.” In short, it is unlikely the RBA buys into the housing bubble hyperbole. When people use the word “bubble” it generally means that they do not know what they are talking about. The RBA presented analysis last year that showed since the end of 2003 disposable household incomes had significantly outpaced house prices. That is, we actually had a slow-burning housing market correction over that six year period.
More importantly for the RBA, there is considerable partial data to suggest – as we have forecast for some time – that the housing market will cool to lower growth rates in line with incomes.
First, Australia’s largest mortgage broker, AFG, has experienced a decline in mortgage applications for four successive months to end January 2010. Last month was, in fact, the single worst set of figures the company has seen since January 2005 in the middle of the last correction.
Second, RP Data and Rismark’s early-stage analysis of sell-side market activity indicates that there are a significant number of new listings coming to market. This is a critical point. One of the key stories in 2009 was the surprisingly low level of listings notwithstanding the very strong price growth. Indeed, the stock of homes available for sale in 2009 was amazingly down on 2008 levels when house prices fell modestly by 2-3 per cent.
Finally, the RBA was presumably comforted by the RP Data-Rismark “hedonic” house price index results for the December quarter, which presented dramatically lower capital growth estimates (+2.1 per cent) than the 5.2 per cent claimed by the ABS.
As I explained in this note today, there were almost certainly material “compositional biases” artificially inflating both the ABS and APM house price numbers as first time buyers faded from the market and were replaced by upgraders buying more expensive homes.
The RBA understands Australia’s housing market as well as any analyst, and has a team of outstanding professionals led by Dr Anthony Richards dedicated to the task. While the Governor’s first – and somewhat inelegantly put – words on housing in 2009 were widely misinterpreted to imply that he believed Australia was experiencing a housing bubble, in all his statements since he has railed aggressively against this description and denied ever using the bubble moniker. Echoing arguments we have been making since 2003, the RBA’s simple message has been that we have to elastify the supply-side of the housing market in order to avoid facing excessively strong price growth down the track. And I fully support the RBA’s thoughtful jawboning in this context.
