Man, Adam Carr really rocks as an interest rate strategist. There is nobody more entertaining to read. Here is his full note from this 'arvo:
"I think the mistake many people are making, or the critical error of judgement, is that in formulating an economic and rates view, they are looking at recent data, recent flood affected data, and concluding that the economy is weak. Worse still, they have concluded that the RBA thinks the economy is weak, even though the bank itself has repeatedly said this isn’t the case.
The RBA very obviously is not of that view and I don’t think they could possibly make things any clearer. Rates are going up and probably soon. As always, nothing is ever a fait accompli, but this is a hawkish set of minutes, following on from a hawkish SOMP – it is a strong signal to the market and one that is very clearly being misread in my opinion (AUD fell, go figure). As far as I can tell, whenever they have used the phrase – “higher interest rates were likely to be required at some point” they have followed through with a rate hike either at the next meeting or the one after.
There really should be no confusion and it astounds me that some analysts are still out there arguing there is no case to hike near-term, like they are actually surprised. You people need to spend less time speaking and more time studying economics. The RBA for their part reiterated again today, as they have in the past, “that the data becoming available for Australia were being significantly affected by earlier floods and Cyclone Yasi” and so “it was appropriate to look through the temporary effects on inflation and growth and to set policy based on the medium-term outlook.”
The funny thing is, they told us what the medium-term outlook is and the thing I really don’t get, what I really don’t understand, is that even those arguing for a rate hike, oh I don’t know, never, don’t disagree with that outlook. Strong growth and elevated inflation. Could they have made it any clearer – seriously? The bank just revised up their inflation forecasts, just the other day in fact, and expect headline CPI, which is already at the top of the band, to remain there for a few years and core to hit the top by year end 2011 or, in about 6 months – that’s six months, and, critically, to stay there for some years. No case for a near-term rate hike? Are you $%*#ing kidding me?
Check out what the RBA is saying on the global front “Recent data confirmed above-trend growth in the world economy, which was boosting commodity prices.” Moreover the Bank stated that “monetary policy remained accommodative in most countries, which was adding to pressure on commodity markets. In this environment, global inflation risks appeared to have moved to the upside.” So globally we’ve got above trend growth and rising inflation. Check.
On the domestic side, the RBA noted there hadn’t been a lot of data - and there wasn’t at that meeting. Admittedly what we have seen since then has tended on the weaker side. But it doesn’t change anything.
Lending has been weak for a while, largely flood induced, and was weak prior to the RBA upgrading their inflation forecasts. That is, they knew it was weak before they hawked things up. The RBA had already noted that “Conditions in the housing market remained subdued” and that “housing credit had slowed in recent months” and yet they revised up inflation and adopted a considerably more hawkish stance. Weaker than expected retail? The bank may not have had that data at the meeting, but they certainly had it in formulating the SOMP, they made specific mention of it and yet they upgraded their inflation forecasts and adopted a considerably more hawkish stance.
In any case, the retail survey is nothing better than a confidence survey, and it’s quite clear retailers don’t want higher rates. So the ABS may as well just ask the retailers association whether they reckon rates should go higher and publish that every month. It’d save them some money. What about weaker employment? I wouldn’t have thought so given leading indicators point to strong growth. All we saw in April was some anomalous slump in NSW jobs (The RBA knows the employment data is very volatile) and besides, the actual unemployment rate, a better indictor of labour market conditions, is at 4.85-#$&*ing-percent. The labour market is tighter, it has been tight for a long time. No case for a rate hike? What planet are they on?
June is definitely live, that’s a fact. But it’ll come down to how responsible the board are and whether they can judge policy in the national interest. Voices are very loud in suggesting the AUD is tightening financial conditions and that fiscal policy is contractionary. Although funnily enough, less so than what the RBA would have been forecasting.
It’s a positive sign that the RBA noted these points and yet still revised up inflation forecasts and adopted a considerably more hawkish stance – and rightly so as I’ve discussed previously. They also noted the ‘two speed’ economy or the ‘patchwork economy’ which have become buzzwords with little meaning now. It’s comforting then that board members noted “that the significant divergences between different sectors of the economy presented challenges for policy-making, but that monetary policy had to be set for the needs of the overall economy.” Taking that at face value, the board does seem to be thinking bigger picture, thinking in terms of the national interest rather than in terms of the interests of a narrow few. The way I read it then there is nothing left to wait for – not the weaker data flow, not the AUD , not fiscal policy and not the two-speed economy. Clearly the RBA does not regard these objections as reasons to hold rates steady in the near-term. Indeed they were at pains to state that they were not. In my mind, June should be a done deal."
