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."

Saturday, February 12, 2011

The iconoclast's take on the RBA's multiple-personality-disorder

So you can see that the markets quite rightly think the RBA has a case of multiple-personality-disorder. From what I have read so far, Adam Carr, one of the more iconoclastic commentators, gets closest. For mine, the situation is pretty straightforward:

*Prior to the Governor's testimony yesterday, the bank bill futures market was pricing in another two rate hikes. But remember that these are probabilistic, or risk-adjusted estimates. That seems pretty fair, and it is, in fact, rare for the market to price in more once you are in restrictive territory;

*This RBA seems to like to use these parliamentary testimonies as a bit of a PR exercise, where they showcase the softer/kinder face of the central bank. The RBA thinks raising rates is hard yakka. It is not easy bringing the community along. From a pure PR vantage (Vanessa Crowe's influence perhaps?), there is little upside in projecting the impression that you want to crush households with higher rates;

*There is also an element of the RBA's decision-making process being a 'monthly model'. So when the Governor says that rates are 'appropriate for the outlook', to some extent his statement could be read to expire at the next Board meeting. This is important to bear in mind;

*The RBA is clearly worried about inflation expectations (more so than economists appreciate), which alongside unemployment and wages will be another rate trigger. Yet there is no upside in emphasising their concerns about expectations, since this will become a self-fulfilling prophecy (the headlines the next day would read, 'RBA worried about inflation'). In fact, they went to great lengths yesterday to talk down consumer inflation expectations; that is, they really tried hard to explain, in a very explicit fashion, why all these price shocks (floods, Yasi, commodity prices, utilities, etc) are one-off events. The problem here is there is a lot of them. And the pre-GFC experience suggests expectations can drift up;

*In terms of intrinsic hawkishness, Glenn Stevens probably sits a little behind Phil Lowe (# 1) and Ric Battellino (#2). (As an aside, the Deputy Governor really gives you the sense that he is the banking system's best friend! I bet he ends up on one of the majors' boards, like big Ian Mac did.) So when Stevens speaks, you probably get a more neutral assessment of the inflation risks;

*There were, nevertheless, many gems in the testimony, which I have covered below, and will continue to post on above.

Here is what ICAP's Adam Carr said:

"Listening to the question and answer session at today’s parliamentary hearing, I can see a lot of people doving up and that’s probably fair. Stevens’ comments were much more dovish than I had initially believed after the Statement on Monetary Policy. Certainly one of the newswires reckons the RBA has told us ‘rates were on hold for some time’. Bearing in mind that he didn’t actually say that, I don’t think the Bank is truly of that view. Stevens specifically made reference to market pricing, which was, prior to the testimony, 57% priced for July and 64% by August, and suggested that this was a reasonable assessment. That’s different to saying it is the right assessment – or the assessment. Indeed having made that comment, Stevens also said that rates could move earlier. In truth, I don’t think he was really giving much away. They are happy where they are for now, and that is fair, but I also think they are a little perplexed at the moment.

What we know is that; 1) the RBA is optimistic on the global and domestic economy and sees the need to hike rates at some point, assuming this base case scenario plays out. Yet and 2) they think they are ahead of the game, that consumers are cautious at the moment and have noted that inflation currently is contained. This is where I think they are confused and while it’s for these reasons that they believe rates are appropriate “at the moment”, they can’t be that dovish, truly that dovish, with the outlook they have got.

Realistically, they need to either change their outlook or rates are going up sooner than markets think. It can’t be both - it would be inconsistent to have a barely restrictive monetary policy setting, or to be overly reactive, when you are facing the largest hit to the terms of trade in a generation and an unemployment rate below 5%. When you are talking about robust domestic economic growth and core inflation approaching the top of the band by year-end, it is bad policy to get there after the fact."