I speak to a lot of onshore and offshore economists. One of the brightest brains in the business is UBS's rising star, Matt Johnson. He caught the Governor's speech live and relayed to me the following insights:
"My take-away was that the RBA has downgraded their global growth forecast due to financial turmoil and European fiscal tightening and is willing to absorb an inflation print that's higher than their Q2 SOMP forecast of just +0.6%...
Stevens sounded like his speech had been co-written by Ken Rogoff and Bill Gross. The sections dealing with the uncertainties surrounding growth in a deleveraging world were accentuated...
As a result, I don't think that the RBA will tighten unless core CPI is higher than 0.8%...
After the speech Rory Robertson asked about CPI and Stevens dodged the question with boilerplate, saying that the Bank would look at a broad range of indicators, as they always do. In dodging the question, Stevens made an important distiction between the past - about which they can do little - and the future. This distinction re-enforced the impression from the speech that the RBA has lowered their growth and inflation forecasts.
Stevens's answer tells me a little about the inflation model he carries around in his impressive head. I am guessing it's most probably a type of Phillips curve similar to that outlined in Tony Richards' recent RDP.
Simply put, prices go up when the economy is going well and unemployment is low. He didn't say it, but the unstated implication is that these things all matter a lot as we are close to full employment (and hence wage-price spirals are a risk)."
