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, March 1, 2011

Why do Australians love talking about interest rates?

So the RBA Statement today was dead-pan neutral aside from this: "After the significant decline in 2009, growth in wages has returned to rates seen prior to the downturn." For the record, wage growth before the GFC was too high for the RBA. That's them ringing the labour market alarm bell, albeit softly for the time being. The other thing the RBA added was the fact that policy was now "mildly restrictive" in the last line of the Statement. I took this to be emphasising that they potentially have a way to go to get to really restrictive. Others no doubt thought that it was a dovish remark. People tend to read what they want to see.

Now the Governor was complaining the other day in parliamentary testimony about how much media attention interest rates get in Australia, which he claimed was unusual by international standards. I was surprised by this, since the Governor had previously been the first to highlight the fact that around 90% of all mortgagors (not mortgagees!)--mortgagees are lenders--have variable rate home loans in Australia. The Governor brought this to our attention because it meant that during the GFC the RBA could deliver massive cash-flow relief to around 4-5 million households by cutting its target cash rate. In contrast, most US borrowers are on long-term fixed rate loans, which makes life hard for the Fed, and in the UK the split is about 50:50 between fixed and variable. Fixed also dominates in NZ.

It is not, therefore, surprising that interest rate decisions capture so much attention back home. They are much, much more relevant for the hip pockets of Australian households than borrowers in most other developed countries.

Nonetheless, you got the distinct impression today that the RBA was trying to kill off media speculation on the next rate move. While it could easily come in May, they gave absolutely nothing away.

In terms of its communications, the RBA has a delicate balancing act. On the one hand, it is very worried about external inflationary pressures combined with internal inflation expectations. On the other hand, it does not want to 'talk-up' inflation, otherwise it will become a self-fulfilling prophecy.

In fact, the RBA is doing everything possible to 'talk-down' inflation, which the market is misinterpreting as dovish commentary. This is wrong. The RBA ain't remotely dovish. Their No. 1 concern is brewing global inflation. In a small, open economy, domestic inflation is to a significant degree determined by offshore inflation. So if you have rising capacity constraints internally combined with price pressures externally, it makes for a potent mix.

And then the RBA wants to give allegedly risk-averse Australian households every opportunity to remain parsimonious; that is, to stay thrifty with their finances. To date, it has not yet received any really hard evidence that the consumer caution that it has sought to attract so much attention to, and to reinforce as a positive behaviour that will reduce the probability of future hikes, is abating. But if rates remain on hold, that time will come. For now the RBA is data-dependent. The first clear sign that consumer purse strings are opening wide will trigger an almost immediate whack with the rate stick.

Finally, to the RBA's latest analysis of commodity prices:

"Preliminary estimates for February indicate that the index rose by 2.2 per cent (on a monthly average basis) in SDR terms, after rising by 5.3 per cent in January (revised). The largest contributors to the rise in February were increases in the estimated prices of iron ore and coal, reflecting some further adjustment towards the higher contract prices in the March quarter. Increases in the prices of crude oil and wheat also contributed to the rise, while beef & veal prices fell. In Australian dollar terms, the index rose by 1.9 per cent in February. Over the past year, the index has risen by 48 per cent in SDR terms. Much of this rise has been due to increases in iron ore, coking coal and thermal coal export prices. With the appreciation of the exchange rate over the year, the index rose by 32 per cent in Australian dollar terms."