Blocko has added some meat to the bones of a few memes that AMM has been developing.
1. Bloxham believes the RBA's 'cautious consumer' thesis is a 'circular reference'
Our words, not his. So, we've been arguing this for ages...Consumers are cautious largely because the RBA has made them so. And if rates stay on hold until Q4, consumers ain't gonna remain parsimonious. You can bet next week's wages on that. This is Blocko's take:
"For some time now the RBA has been suggesting that the Australian consumer has become more ‘cautious’. We have long thought it curious that the RBA, with its market-oriented approach to the economy, is of the view that weaker recent household consumption growth is due to a ‘behavioural’ change not a response to a ‘relative price’ shift. Indeed, the RBA’s argument seemingly favours a ‘new normal’, over the ‘old normal’, which for the RBA is quite frankly, abnormal...The bottom line is that we are sceptical of a behavioural change to permanently increased household ‘caution’, think there is upside risk to household spending and that the RBA will need to ‘constrain’ household spending by lifting rates further."
2. The RBA is playing funny buggers with an unemployment rate forecast of 4.5% by mid 2013. Yes, 2013!
We brought this to everyone's attention when the RBA published its SMP, noting that Australia could easily hit 4.5% by the end of 2011, let alone 2013. [Insert Leyton Hewitt-style 'C'mon!'] We argued that the RBA had created a straw-man to justify early hikes: tell people you are forcasting 4.5% by mid 2013, and, then, *if* the UE rate falls towards 4.5% during 2011, you can say, Wow guys, whatdoyaknow! Things are moving much more quickly than we expected. While we are really a warm and cuddly central bank, we are going to have to bang you across the head with an early rate hike. This is Blocko's analysis:
"A key to our outlook for interest rates is that the labour market tightens up further. We think the RBA is also concerned about this. A clue is found in the recent publication in the RBA’s official statement of a forecast for the unemployment rate. The first ever! Its forecast is that the unemployment rate will fall to 4.5% by mid 2013. This is highly unusual. At the best of times the RBA seeks to stress how uncertain the future is, so why forecast to 2013? Forecasting the unemployment rate is also notoriously difficult. Consensus forecasts are all over the shop when you look at historical comparisons. So why would the RBA do this? We think it is a quasi-target and a rhetorical device to signal that the labour market is something it is watching closely. If it starts to look like the unemployment rate is getting there sooner than desired, it will motivate a tap on the brakes. We think it will get there sooner – much sooner if there isn’t a tightening."
3. The 'very high' exchange rate
We also highlighted these words when we first saw them. The RBA repeatedly belaboured the 'very high' bit. Almost all economists ignored it. However, we were not so sure what to make of the syntax: does it denote firm financial conditions, or insinuate that the exchange rate has maxed out? Blocko helps out:
"Recent RBA publications have suggested that the exchange rate is ‘very high’. We think this is very important! The RBA is likely to be suggesting a couple of things. First, it is thinking further appreciation is unlikely. Adjectives such as ‘very’ are used frugally by the RBA. Of course, as we have noted done before, there is almost no chance the RBA would intervene to manufacture depreciation, or cap an appreciation. The RBA does not intervene with a target in mind. Indeed the exchange rate is the Australian economy’s guardian angel, so to speak. It is nonetheless apparent that the RBA may be somewhat uncomfortable with the ‘very high’ level of the exchange rate. Second, depreciation from here would likely put upward pressure on inflation, and could require higher interest rates. Particularly if it depreciated due to a global shock that does not genuinely reduce Australia’s growth prospects and is just part of the global risk on/risk off cycle. Suffice to say, the exchange rate has recently played a larger role in disinflation in the economy than most of us – including the RBA – had expected. A reversal is a probable upside risk to inflation and rates. It is worth pointing out that our own currency strategists see downside risk for the AUD. If their view that the AUD/USD exchange rate depreciates to 0.85 by year-end plays out, this would probably put upward pressure on inflation and could motivate further rate rises."
