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."

Wednesday, May 4, 2011

Markets Deaf and Blind to Uncomfortable RBA

A hilarious take on the market's reaction from the seasoned RBA watcher at Dow Jones, James Glynn...News Ltd's Terry McCrann is similarly inclined. June is live.

DJ MONEY TALKS: Markets Deaf And Blind To Uncomfortable RBA
By James Glynn
A Dow Jones Newswires Column

SYDNEY (Dow Jones)--Financial markets appear to be deaf and blind to the message of the Reserve Bank of Australia which Tuesday moved to establish a clear tightening bias, and one laced with growing urgency and concern about inflation.

The RBA said inflation is set to rise and remain uncomfortably high at or above its 2% to 3% target range over the medium term. RBA Governor Glenn Stevens spelled out a case for an interest rate hike sooner rather than later.

That news didn't get through to investors.

The Australian dollar slipped. At 0710 GMT, it was at US$1.0895, down from US$1.0915 just before the RBA statement. Three-year bond futures rose a few ticks and 30-day interbank futures pushed out the next hike from February 2012 to March 2012.

It is time for investors to wake up and smell the coffee. The policy interest rate in Australia, which has been at 4.75% since November, is set to rise in coming months.

The message from the RBA has been clear for a while. Inflation is headed to the top of the target band. That alone is enough to have inflation-fighting central bankers losing sleep.

The inclination to hike likely gathered momentum last week when inflation data surprised to the upside. Headline inflation in the first quarter was 3.3%, up from 2.7% in the final quarter of 2010, while core readings showed clear signs of bottoming. The high Australian dollar will take some pressure off inflation, but not enough to deter the RBA.

"The recent information suggests that the marked decline in underlying inflation from the peak in 2008 has now run its course," Stevens said in his statement Tuesday.

"While the rising exchange rate will be helping to hold down prices for some consumer products over the coming few quarters, over the longer term inflation can be expected to increase somewhat if economic conditions evolve broadly as expected," Stevens added.

Perhaps the RBA's message will hit home Friday when the central bank announces revised medium-term inflation forecasts. These are likely to underscore its hawkish stance.

Short of that, Stevens might need to purchase a loud hailer and yell from his high office in Martin Place, Sydney.

It is important to step back and view the Australian economy from a long-term perspective to understand the RBA's likely concerns. The unemployment rate is headed lower, wage growth is headed higher and the mining investment boom is engulfing the economy.

While the first half of the year has been beset by disasters and the economy may even contract through that period because of lost coal exports, Australia is on the cusp of a mighty boom that will be hard to manage.

Inflation concerns at this stage of the game spell one thing: the policy interest rate will rise soon.

-By James Glynn, Dow Jones Newswires; 61-2-8272-4685;