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."

Friday, August 6, 2010

Why you should be looking at the Statement on Monetary Policy @11.30am today

The RBA's all-important quarterly Statement on Monetary Policy will be released at 11.30am this morning. I will, of course, be taking a close look at what they have to say about house prices, which always tends to be a good read. Here it will be fascinating to see what the RBA makes of the large disconnect between the ABS and RP Data-Rismark June quarter results.

Of greater interest will be the changes (if any) the RBA discloses to its GDP and underlying CPI forecasts. Some smart economists are betting on nontrivial downgrades to both in light of the North American malaise. This is, of course, a 'dovish' story. I am not so sure. The RBA have been very bullish on Australia's trading partner growth, and China and India particularly, in everything they have published to date. Furthermore, economists (and the market) frequently ignore the 'endogeneity' of policy. If the US does experience lower-than-expected growth, there will be a 'reaction function', which, in this case, is likely to mean more quantitative easing to further stimulate the economy. Naturally this is but short-term remedial action, and it is an open question what US policymakers can really do in the medium- to long-term given their fiscal constraints.

The key section is the final chapter, entitled Economic Outlook, which is what all the economists will be pouring over. Enclosed below are the GDP and CPI forecasts from the May Statement on Monetary Policy.

Matt Johnson of UBS reckons there is a chance they will cut the 3% underlying inflation estimates in June and December 2012. He also believes that they will slash the December 2010 and June 2011 GDP numbers to 3% from 3.25% and 3.75%, respectively.

In this context, much hinges on whether the RBA changes the wording in the following sentence:

"The central forecasts are summarised in Table 14 and are based on the technical assumption of some further rise in the cash rate over the forecast period, with the assumed path broadly consistent with market expectations."

The germane questions are: (1) will the RBA reference some "further rise in the cash rate over the forecast period"; and (2) will they remove the statement that these rate rises are "broadly consistent with market expectations." In relation to the latter, the market is barely pricing in any future rate hikes. So if they do leave this statement untouched, they would seem to be telling us that we are near the end of the tightening cycle. If, on the other hand, they remove it, one might conclude that they are at loggerheads with the market.

Related to all of this is the RBA's need to condition 'expectations' with a tightening bias. As I noted in this article for Business Spectator yesterday, one quarter's success in 12 inflation prints does not a successful central bank make.

I will update you with any news on what the RBA has done after 11.30am.