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, September 6, 2011

The RBA has *not* dropped its tightening bias--it's keeping rates higher than average

Some people have claimed the RBA has shifted the stance of monetary policy to neutral. The first point is wrong for one factual and a second subjective reason:

(1) as a matter of pure fact, the RBA has left its target cash rate at a level, which combined with the currency, it claims is "exerting a degree of restraint" (ie, restrictive policy);

(2) the RBA has reiterated that even with the ongoing turbulence offshore and restrictive policy, the "Board remains concerned about the medium-term outlook for inflation" while providing an upbeat assessment of the domestic economy. On inflation, the RBA comments:

"[M]easures of underlying inflation have been increasing this year, after declining for the previous two years. While they have, to date, remained consistent with the 2–3 per cent target on a year-ended basis, the Board remains concerned about the medium-term outlook for inflation. A key question will be the extent to which softer global and domestic growth will work, in due course, to contain inflation."

On the Australian economy's prospects, the RBA rightly offers a sanguine analysis:

"At this stage, little evidence is available to gauge any effects of the European and US problems on other regions. Prices for key Australian commodities have remained very high thus far, with growth in China continuing to look solid. As a result, Australia's terms of trade are now at very high levels and national income has been growing strongly. Investment in the resources sector is picking up very strongly and some related service sectors are enjoying better than average conditions. In other sectors, cautious behaviour by households and the high level of the exchange rate are having a noticeable dampening effect. The impetus from earlier Australian Government spending programs is now also abating, as had been intended. Overall, the near-term growth outlook continues to look somewhat weaker than was expected a few months ago. Beyond the near term, growth is still likely to be at trend or higher, unless the world economic outlook continues to deteriorate."

In contrast to what some suggest, the bar for cutting rates in Australia, which would be wonderful for consumers, retailers, and house prices, is high: we would need to see big downward surprises to major economic indicators, like GDP and unemployment tomorrow and on Thursday, combined with a very subdued core CPI print (eg, 0.6% or less) in late October.