Ross Gittins delivered a fascinating speech this week during which he gave me a subtle slap for forcing the RBA to stop tipping-off journos about the internal executive's rate recommendations prior to its Board meetings. This in and of itself demonstrates how right we were to push this line (our actions also brought about the demise of the former 'Shadow Governor', Terry McCrann, after the October meeting).
As an aside, it is a little disturbing that one of the RBA's chosen voice-pieces once again argues that the RBA's rate decisions are made unilaterally by the Governor, which is a narrative one gets from all the other commentators: ie, the Board is largely irrelevant. You have to wonder where this is coming from. Put bluntly, it is not especially good form.
Gittins also dismisses the response of almost all economists to the RBA's recent communications, which, as I explained in a post below, had resulted in them shifting back their first rate hike to Q2 or Q3. Gittins thinks that the RBA's reference to a pause in this tightening cycle expired after the December meeting. Ergo, the February meeting is now live.
He also touches on a point I've made here before: domestic financial markets pay far too much attention to what is happening in the US, and need to shift their cross-hairs more towards our key trading partners.
Finally, Gittins highlights a thesis I have been pushing hard: that this RBA is going to be more forward-looking than its predecessors because (a) it is learning from its past mistakes in placing too much weight on historical data flows, and (b) it recognises that Australia is undergoing an unprecedented investment and income shock that policy needs to pre-emptively anticipate if it is to have any hope of maintaining price stability. Here are some of the quotes:
"It’s been another bad year for business economists and markets in their attempts to second-guess the Reserve Bank’s rate adjustments. I said that last year but - though I haven’t counted up - this year has been a lot worse, with the ratio of misses to hits way up. It’s become a lot harder for you guys to predict now the nation’s economics editors have retired from the prediction game. But that’s the way the more loud-mouthed of your brethren seem to have wanted it.
I should say, however, that market economists’ predictions have been closer to the mark - or less far off the mark - than market pricing. Why? Because the markets are still too focused on what’s happening in the US, whereas the economists have twigged to how heavily the Reserve’s thinking is influenced by developments in the Chinese economy...
Stevens tacitly admitted that monetary policy isn’t as forward-looking and pre-emptive as it should be. He couldn’t think of any time when it later became clear the Reserve had tightened too soon, but he could think of ‘several times’ when it should have tightened earlier. This is a reference to the first half of 2007, when the Reserve should have tightened further but didn’t because of two successive CPI results that were falsely reassuring, and ended up having to tighten before and during the election campaign. The proposition is that the more timely your tightening, the less you end up having to do. The lesson from this episode is that you have to trust to your judgement of the big picture - which embodies your core beliefs about how economies behave - and not be too swayed by bits of data than don’t fit.
I think Stevens’ remarks alluded to two different circumstances: when you know you’re behind the curve and when you know you’re not. When you’re not behind the game - which should be most of the time - increases are likely to be ‘only fairly gradual and not very close together’. (Say, before each quarterly SoMP?) When you believe you are behind the game, however: ‘I think it is better really to move in a reasonably timely fashion to a point where you might be able to rest for a while. That is a better position to be in.’ I think this explains Stevens’s behaviour between October last year and May this year. He kept saying he was going to move ‘gradually’ towards ‘normal’ (neutral), but in fact he moved at six meetings out of seven (with only two of them SoMP meetings). Why? Because he knew he was behind the game: he’d cut like mad fearing a severe recession but the recession was proving to the remarkably mild so he was anxious to get back to neutral without delay. He eventually decided the banks’ extra rate rises had shifted neutral down from 5.5 per cent to 4.5 per cent, and once he reached that point in May this year, he rested for six months before deciding it was time to start gradually tightening into the restrictive range.
Looking to the monetary policy outlook for 2011, at the parliamentary hearing Stevens gave a lot of hints about the timing of his next move. Quote: ‘What it means is that for the period we are going into in the near term I think this is about the right level. At the moment most commentators do not anticipate and market pricing does not anticipate any further near-term change by us for quite some time. I think that is probably a reasonable position for them to have based on the information we have now.’
But exactly how long is ‘in the near term . . . for quite some time’? I think it’s a guarantee that’s already expired: it applied only to the December meeting - and so, of course, will carry us through to the February meeting. But it leaves the February decision an open question. So if you rule out a February rise you’re doing so on the basis of your own judgment, not a clear indication from the boss.
My call for next year is that, assuming the economy continues to strengthen as forecast but there’s no rapid build-up of inflation pressure, we’ll see another two or three tightenings, well spaced over the course of the year."
