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."

Tuesday, May 1, 2012

McCrann says 50 basis points is "certain"

Today is a tough one to call. I am still 60:40 in favour of 25 over 50, but anything could happen. If, as I suspect is the case, the RBA has recommended 25 in its board papers, then the staff will walk into the board meeting with no "absolute certainty" (to borrow a McCrannism) about the final outcome. They know the board might push them into cutting 50. Anyone with significant corporate experience knows that with a board comprising nine strong personalities with very different views of the world, there are a range of possible decisions if consensus is what you are seeking.

Readers may recall that I argued this all of last year; more specifically, that there were likely occasions on which the RBA staff, which holds only two of the nine RBA board seats, have had their recommendations rejected.

At the time, News Ltd's Terry McCrann dismissed my arguments out-of-hand as nonsense. Problematically for Terry, outgoing RBA board member, Graham Kraehe, revealed to The Australian newspaper in January this year that I was, in fact, right; that the seven non-RBA board members, which include six dovish private-sector representatives, had “regularly” rolled the governor’s (or “staff”) monetary policy recommendations. Here is exactly what Kraehe said (observe how he unwittingly concedes that the non-RBA members of the board have never argued for higher rates):

 “There have been a number of occasions when the basic recommendation from the staff hasn't been adopted… I would not suggest there has been an increase when the staff said there should be a decrease. But we (the non-RBA staff) have said, 'Let's not move, let's sit'… And that has happened reasonably regularly."

Now to McCrann today. I disagree with him on a couple of fronts. First, if the RBA only cuts by 25 we are likely, but not certain, to get another 25 basis point cut in June, or possibly further down the track. Much depends on the unemployment data: if it strengthens up, and the world is cruising along just fine, then another cut is not guaranteed. I'd argue that the current political atmospherics make actually executing on tight budget commitments even less likely too. That is to say, the RBA may be inclined to more heavily discount any representations made by the Government on the 8th of May. McCrann, in contrast, thinks a follow-up 25 is an "absolute certainty":

"The really important thing to understand is that the RBA management, led by the governor Glenn Stevens, has clearly decided to cut the official rate by 50 points.What we don't know is the timing. So if the RBA doesn't do it in one hit today, and cuts by only 25 points, then it will - to repeat, it will, not 'probably', or 'almost certainly', but will - cut by another 25 points at its next meeting in early June. One way or the other, the RBA will have cut by (at least) 50 points by the conclusion of its meeting in June."

The second point of disconnect I have with McCrann is how he spins the RBA staff's relationship with the board. While conceding several weeks ago that he was wrong about the nature of the relationship, he now argues that the board still never actually over-rules the staff recommendations (cf. Kraehe's quote above!). I am not suggesting there is any animus. But, at the same time, I do not agree with McCrann's characterisation either (it seems like a classic ex post rationalisation by the staff that they really are in control of all board decisions):

"But we also know, thanks to comments made by recently retired RBA director Graham Kraehe late last year to our sister paper The Australian, that the board had on occasion 'tweaked' the formal recommendation from Stevens. This means there are three possibilities today. Stevens recommended 25 and we get 25. Stevens recommended 25 and we get 50. Stevens recommended 50 and we get 50. Three things are crucial to understand about all this. Kraehe's comments have been overly - and wrongly - interpreted as saying that the board had overruled Stevens and management. The truth is that they only delivered a different outcome to the formal recommendation when Stevens and management were relaxed about it."