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."

Monday, June 6, 2011

Macquarie canvasses conflicts posed by RBA's dovish business board members...

This is an excerpt from an outstanding note published today by Macquarie's Brian Redican. He also considers the consequences of the regrettable departure of Professor Warwick McKibbin, who is widely thought to be a 'predatory avian' in contrast to his 'pavement-dwelling' business peers (aka doves):

"We would never pretend to know how individual Board members vote on monetary policy. But a shift in the composition of the RBA Board after the July Board meeting may increase the hurdle to get a rate hike over the line. Note that there are currently nine members of the RBA Board, and while the decisions are usually made on a consensual basis, the views of individual members are probably more important when the decision is finely balanced.

Of course, there are the three ex-officio members -- the RBA Governor, RBA Deputy Governor and the Treasury Secretary, Martin Parkinson. If these members vote together, then two of the six remaining Board members would be needed to achieve a majority. Of the five business Board members, two are directors of companies with exposure to the consumer, two are directors of companies that are exposed to the strong A$ and one has exposure to the gas sector. Of course, RBA Board members are not like politicians representing the narrow sectional interests from which they come. But it would not be surprising if they were, at least, more sensitive to the impact of high interest rates on consumers or the A$ when they can directly see the effects through the prism of a particular business.

Thus, it's possible that you could have four of the Board members very happy to hike rates, while four Board members might be much more cautious. In this situation, the views of the academic on the Board could be crucial. Professor Warwick McKibbin has been on the RBA Board for almost 10 years and during that time he has assiduously avoided making any comments about Australian monetary policy. But he has been a vocal critic of other central banks for running monetary policy that was too loose for too long. Thus, it's tempting to conclude that he might also support higher interest rates at present.

The June Board meeting will be Professor McKibbin's second last, after which he will be replaced by John Edwards. Dr Edwards has had a varied career including as a journalist, policy advisor to Treasurer Paul Keating, Chief Economist at an investment bank and most recently an advisor to the Bahrain Economic Development Board. During this long period in the public eye, Dr Edwards has always appeared as a highly conventional economist who has supported the goals of the RBA and so there is no reason to think that Dr Edwards will be a "dove" on the RBA Board. But again, there is a risk from the perspective of the RBA staff that he may be less willing to hike rates than the man he is replacing.

Of course, it could be argued that as Professor McKibbin will still attend the July Board meeting, there is no rush to tighten policy in June. But July isn't a popular month for the RBA to adjust monetary policy. In fact, it hasn't changed policy in July since 1997. And that simply reflects, first, the lack of any significant data releases between the June and July Board meetings. And second, the very significant CPI data which is released after the July Board meeting."