I think this is possibly the finest speech Stevens has ever delivered. Evidently emboldened by the wide-ranging--if not belated--influence of his "glass half full" effort in June, which made great inroads into the push against reflexively sensationalist media reporting, Stevens has redoubled his attack today. The RBA Governor is clearly comfortable with the current setting of interests rates--you can almost sense his ease projecting out of the words. Yesterday I happened to be sitting in a meeting with a senior newspaper editor and opined that I thought his remarks today would be "hawkish" given the chosen title: "The lucky country". It was an obvious sequel to the June missive. And so it proved.
The RBA understands that the community is being misled by two dynamics. First, numerically-weighted survey measures of the economy are giving downwardly biased estimates of growth due to the fact that the growth pulse is coming from a narrow source: only 20-30% of the overall economy. If you poll businesses on a purely numerical basis, and 70% are expanding at a very weak pace while 30% are booming, you are going to get a negative net result. The same principle applies to measures of consumer confidence.
A second technical issue is that there is a risk of an adverse feedback loop from negatively biased media reporting back into real consumer and business behaviour (ie, the idea we can talk ourselves into recession). Having put rates into demonstrably stimulatory territory, the RBA is now eager to ensure that these changes actually have the desired impact. So it is fusing together open mouth operations with the tangible policy action.
As I've mentioned before, a third point is that having cut rates pre-emptively, and repeatedly, for explicitly "insurance" purposes against catastrophe, with said calamity not materialising, the RBA realises it is well ahead of the game. It was jawboned into relaxing policy, and probably does not want to do so again until it has hard empirical evidence that it needs to (a very low core CPI print might do it). It is also anxious about the effect of ultra low rates on a highly rate sensitive housing sector (recall Melbourne house prices appreciating 35% over 2009 and 2010 care of a 5.1% discounted mortgage rate, which was a 30 year low).
In his speech today, a more confident RBA Governor once again questions the prevalent pessimism, focussing, in particular, on the myths regularly propagated by doomsayers (as I have). What is interesting is that he concentrates a significant share of his verbal beating for those who have led us to believe that Australian house prices are likely to collapse. More specifically, he tackles the controversial topic of Australia's house price-to-income ratio, its current level, and how it compares to peers overseas. He notes, as I have on too many occasions to count, that the current price-to-income ratio is at its lowest level since the early 2000s, and does not appear wildly out-of-line with international benchmarks (see charts below). Note also the references to RP Data-Rismark in the sources to the charts. More on this later--I've got to run to a meeting!
