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."

Tuesday, February 1, 2011

Bloxham: "today's RBA statement was on the hawkish side"

Paul Bloxham left the RBA after 12 years serving as an economist in September 2010. He now serves as Chief Economist of HSBC. I think he parsed the RBA's pithy Statement best today--most other market economists missed some of this nuance. Here are the highlights:

"The hiatus is over. And with recent weeks proving highly eventful for the Australian economy – floods, low inflation numbers, sharply rising coal prices and a global economic acceleration – some clarity on the RBA’s thinking is very much welcomed. And there are lots of goodies in here.

First and foremost, what is clear is that the floods haven’t changed the general macroeconomic outlook. The floods don’t even rate a mention until over half way into the statement (paragraph 6 of 9). Up front, the statement talks about the strong global economy, rising commodity prices, mining investment boom and tight labour market. The floods are expected to have a temporary adverse effect and, as the RBA points out, they will be seeking to look through the temporary part. They suggest that over the next year or two repair and reconstruction will add modestly to aggregate demand.

Where it really gets interesting is the RBA’s view of the floods effect on inflation. To quote, ‘the net additional demand from rebuilding is unlikely to have a major impact on the medium-term outlook for inflation’. The RBA has been very careful to put the word ‘major’ into this sentence – they are cunning wordsmiths, all of them. In our view, this suggests that the RBA is certainly entertaining the idea that the floods could, indeed, boost inflation in the medium-term. And thus may require a monetary policy response. We expect further clarity on this point in the quarterly official statement published later this week.

Interestingly the statement spends very little time discussing the low Q4 CPI result. The phrasing also suggests they very much see it as a thing of the past. They suggest that the low result was due to the high level of the exchange rate, the ‘earlier’ decline in wages growth and strong competition in some key markets – likely referring to increased international competition for retailers due to the high AUD and on-line technology facilitating purchases. Then they suggest that they expect inflation to be consistent with the target band over the next year – which we should note is unchanged from the forecasts published in November, which had inflation rising to 2.75% by end 2011. Importantly, these forecasts assumed a rising path for interest rates. This is likely to imply that inflation is expected to rise from here, given it was at the lower end of the band – 2.25% – in Q4.

RBA observers should now be looking out for Friday’s official statement to get a deeper insight into current RBA thinking. We expect the medium-term inflation forecasts to be unchanged from those published in the early November statement – that is, we still think the RBA will expect inflation will rise to the top of its target band over the forecast horizon. Particularly as they typically assume the “market path” for interest rates – albeit they are quite vague on what this means – and markets currently have less than 25 bps of tightening priced in this year.

Rates are on hold for now. We think today's statement was on the hawkish side. Friday’s Official statement will further clarify the RBA’s outlook. We continue to expect the next rate rise to be in May or June."