The author has been described by News Ltd as an "iconoclast", "Svengali", a pollie's "economist muse", and "pungently accurate". Fairfax says he is a "Renaissance man" and "one of Australia’s most respected analysts." Stephen Koukoulas concludes that he is "85% right", and "would make a great Opposition leader." Terry McCrann claims the author thinks "‘nuance’ is a trendy village in the south of France", but can be "scintillating" when he thinks "clearly". The ACTU reckons he’s "an enigma wrapped in a Bloomberg terminal, wrapped in some apparently well-honed abs."

Saturday, July 24, 2010

Next CPI print will be a cracker and runs risk of politically tarnishing RBA...

The June quarter CPI print is looming as an absolute cracker. Could it change the course of the election? Quite possibly. If it comes in at 0.8 per cent, which according to those-in-the-know makes a rate hike a 50:50 bet, what will the RBA do? If they don't hike at 0.8 per cent, even though that implies an annualised rate of growth above their 3 per cent maximum limit (and noting that the trimmed mean and weighted median measures have been above the RBA's upper bound for three years now), will they forever and a day be accused of political bias by the Liberal Party? Almost certainly.

In the table below, I have culled the Reuters survey to leave only those banks that I know have larger economics teams. The conclusion remains the same.

One market economist claimed the other day that there is a perception that Glenn Stevens is personally sympathetic to the ALP, and was the guy inside the RBA who found most fault with the Liberal Party's interest rate arguments during the 2004 election. I have no idea whether this is true. Indeed, I would say that the Governor is centre-right when it comes to his economics. But it is a telling insight into the psychology underlying all of this. (For the record, I have offered the Governor a lot of support of late and believe that he is doing a fine job!)

Unlike the November 2007 decision, where the core CPI print was a higher 0.9 per cent and clearly increasing (averaging the trimmed mean and weighted median for September), this time around could be much more complex. And no matter the integrity of the individuals in question, the temptation to tilt a decision to, say, avoid rocking the political boat when there is conflicting evidence, might be overwhelming.  This is a matter of shades of grey, much like Kerry O'Brien's treatment of ALP and Liberty Party members when interviewing them for the ABC (see here).

The Shadow Governor of the RBA, Terry McCrann, Rory Robertson, and others are all telling us that 0.8 per cent is a line ball call for the RBA.

But one point that nobody has yet made is this: how does the RBA honestly justify not hiking in August with a 0.8 per cent core inflation print (above its target range) during an incredibly sensitive election month when it hiked in May with exactly the same outcome (vague references to the medium term outlook are unlikely to cut the mustard)? There is little doubt that Glenn Stevens and his cohorts face a difficult dilemma.

My guess is that, whatever the outcome, they will end up making the right decision.