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, May 9, 2012

The Budget's crucial interest rate assumptions

It is interesting to observe the differences between the RBA and Treasury's assumptions about future interest rate changes when making forecasts of economic growth. The RBA and Treasury have near-identical real GDP estimates for the years 2012, 2013 and 2014, although the RBA allows--wisely--for much more uncertainty in its projections. They both settle at "around 3 per cent". They also have the same/similar peak unemployment rate forecasts of about 5.5%. Tomorrow's labour data will provide another good test of these numbers. In making its forecasts, the RBA says:

"The exchange rate is assumed to remain at its current level over the forecast period (A$  at US$1.03, TWI at  76), which is around 3  per cent lower than assumed in the February Statement [CJ: even lower today!]. The price of Tapis oil is assumed to remain at US$125 per barrel over the forecast period, similar to the assumption in February [CJ: lower again!]. The cash rate is assumed to be unchanged over the forecast period at 3.75 per cent."

In contrast, Treasury adopts a different assumption--one that the RBA dropped a while back because it was simply too volatile: the financial market's expectations for future rate changes. This seems to imply that Treasury are relying on another 50 basis points worth of RBA rate cuts (confirmed by the AFR's diligence) to hit its surplus targets. Treasury even goes on to jaw-bone the RBA that this is appropriate monetary policy (jaw-boning the Aussie central bank seems to work, so that's not dumb either--especially when the Treasury Secretary sits on the RBA's Board):

"The outlook for trend growth in the economy over the next two years is consistent with the fiscal consolidation being undertaken by the Commonwealth and state governments. As is standard practice, the forecasts assume policy interest rates move broadly in line with market expectations at the time that the forecasts are finalised, with the market expectation at that time being that policy interest rates would be lower over the coming year. The planned fiscal consolidation should continue to provide scope for monetary policy to be eased, if appropriate, without generating price and wage pressures. The impact of the fiscal consolidation, particularly in 2012‑13, should be more than offset by growth in private demand, particularly from the resources sector, with the aggregate economy growing around trend."