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."

Friday, June 3, 2011

Bloxham canvasses problems associated with 'dovish' RBA Board

While I have raised this point many times before here, it is interesting to see HSBC's Paul Bloxham buy into the argument. He also offers some constructive thoughts on the June vs. July vs. August question. I personally don't buy the logic of waiting until July or August, but I can see that it would resonate with some:

"Another issue is that the RBA board may be less gung ho about a near term rate move than the RBA staff. The May board meeting was probably the first in which the discussion is likely to have been about a near term hike – that is, after they saw the strong Q1 CPI numbers. It is quite possible the RBA staff will feel they need another month or two to build the case and bring the board along with a decision to hike.

We have also had press reported interviews with two board members, Roger Corbett and Graham Kraehe, which have been fairly downbeat on the economy. Corbett suggested ‘we haven’t got inflation’ and Kraehe expressing concerns about weakness in the manufacturing industry.

While no one argument above may be enough to offset the medium term case for a rate rise, the sum of the parts is bigger than the whole!

Weighed against these arguments is the fact that the mining boom is seemingly unstoppable, the central bank needs to be forward-looking and inflation is expected to rise strongly from here (by its own admission).

By the same logic you may argue that they should do the whole 100bps all at once. But monetary policy does not work that way. A gradualist approach to monetary policy is preferred. Not least because at any one board meeting it is never the case (at least on the way up) that you can be confident that rates need to be moved this month any more than next month or last month. If it were, then the day before you moved you would know for sure you were at the wrong level. Thankfully this rarely happens.

In the final analysis, the argument that would force their hand this month would be that if they don’t move they will fall behind the curve. Ultimately the main proof of that will be the Q2 CPI result, published on 27 July. But you could still hold this month and not be proven to be behind the curve with a hike in July. This gives you one more month to assess further data on some of the points above, avoids some of the political and communicative awkwardness of the GDP fall and budget issues and gives you time to convince a potentially dovish board of the need to hike.

Of course, the proof may not come and the CPI may be needed to get them over the line. After all, the evidence we have for rising CPI inflation is just one strong CPI observation, for Q1. While it was strong and in underlying terms above the target band, it is also possible that given the big shocks hitting the economy at the time – the Queensland floods in particular – it was a rogue number.

This of course calls for the RBA to wait for another CPI result, and thus the next move could be August. More importantly it is a key reason why Australia needs a monthly CPI, like almost every other developed country has."