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."

Wednesday, July 27, 2011

Heated debate inside the RBA, according to Bloxham

From my mate Blocko today:

"This afternoon’s Policy Discussion Group meeting of senior managers at the RBA could be a rather heated affair.

The economics department will probably focus on the CPI measures and the elevated readings of inflation expectations and recall mid 2007, when inflation started to rise above the RBA’s target band for a sustained period. At the same time, they will be well aware of the downturn on local confidence – which the Governor alluded to in his speech yesterday – and will be asking the same questions we are, about whether it is temporary or the beginning of something more sinister. Are we at a pivot point? As the Governor said just yesterday, ‘measures of confidence are down and there is an evident sense of caution among households and firms … [which] … seems to have intensified over the past few months’.

To strip through the noise they will come up with some well balanced inflation forecasts. It is almost certainly the case that these forecasts will need to be revised up. Today’s results were above the RBA’s last set of public forecasts. They expected year-ended underlying inflation for Q2 of 2.50% and got 2.75%. This will make it difficult to back away from the forecast for 3.00% over 2011, and indeed will probably mean it has to be revised up to 3.25%. This is the natural trigger for a rate rise.

But, the financial markets department, on the other hand, will probably be focused on the possible tail risk events that could play out over the next few weeks as the sovereign debt issues continue to play out in the US and as the issues in Europe are still touch and go.

This is awkward. Our view is that today’s data confirm that the medium term story remains in tact. Inflation is rising as demand seeks to run ahead of supply. This means the next move is almost definitely up -- barring some left of field global financial disaster. However, the RBA will probably see that the balance of risks is such that waiting another month or two for the smoke to clear may be warranted."