July RBA day – it is about the bias

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No surprise that the RBA is a snooze today. Everyone expects the RBA to hold policy steady at 3.5% – though some folks on the shadow RBA are calling for a hike (see here).

With the decision not in doubt, focus ought to turn to the RBA’s bias.

I expect that their formerly strong easing bias will now be a weak easing bias. Since the June meeting, global growth data have not really changed (at a stretch you might argue that the lower US Manu ISM requires a downgrade), and financial market conditions have been stable at only a modestly stressed level. Thus, the global picture is not going to drive this meeting (on Europe i would guess they might say – a good step, but there is a lot left to sort out).

The domestic data has been okay – but i will be surprised if they upgrade to above trend. Real GDP was much stronger than they expected – though i would guess they have their doubts about the real/nominal splits. More importantly, the trend unemployment rate remains stable in the 5% to 5.25% range it has traced for a well over a year – so they may upgrade to ‘around trend’.

There have been no new inflation data – though the stability of the AUD and improvement in productivity (to the extent you believe the Q1 national accounts) will have allayed some of the worries about the upside risks to their inflation projection.

With most things stable, i expect that the RBA will say that the level of rates is appropriate – but note that risks remain tilted to the downside. I would say that this is a weak easing bias.

I doubt that this is the end of the easing cycle – but it is possible to imagine the RBA on hold until November. By November i expect to see clearer evidence that unemployment rate is rising toward 5.75% in Q1’13, and confirmation that underlying inflation is running around 2%.


  1. I agree on what happens today.

    My guess is they will be watching nominal growth with great interest.
    The TD Securities/ Melbourne Uni price index is telling us the turning point for inflation to start rising has not yet occurred.

  2. I agree with Kouka it is reasonable at picking turning points and given that is why they started it that is why I look at it. This of course leads to the inevitable ask of why oh why don’t we have a month;y CPI figure

    1. Better than watching monthly global cpi and commodity prices? I do not think so. But those indicators suggest low cpi, so i happen to agree with him this month :)

      Sent from my iPad

    2. Monthly CPI: Because it costs money, is why, money the govt is not willing to spend.

      I don’t think there is an easing bias anymore. I think its neutral at best. My feeling is the next move will be up not down.

      1. hmm, i think there’s still a weak easing bias. the fiscal path is basically large stimulus up front, with back-loaded drag – so it’s not yet clear they are going to be tightening any time soon. myself, i favor an extended pause today. i’d guess on hold until November.

  3. I think your thoughts on fiscal policy is wrong.
    This means I am in kouka’s camp

  4. ECRI reaffirmed their US recession call yesterday.

    Just listening to “Lessons from the GFC” on Radio National’s ‘Big Ideas’ programme (BTW, are you the Ricardo on the panel??). Plenty of hand-waving on fiscal policy and debt but nothing of note on monetary policy. Yet it’s monetary policy that drives the nominal economy and it was Australia’s monetary policy that saved us from recession. Even McKibbon neglected monetary policy. How sad.

    1. Nope, i was not on that panel. The nominal real split looks like it is about to get interesting. We had strong real growth but no nominal growth and profits are suffering as a result. With sticky wages that ought to mean the unemployment rate begins to increase. It will be interesting tonsee how this plays out, that is for sure. I do not expect much inflation for a few years.

      Sent from my iPad

  5. Yes, profits and wages growth are both suffering, with the result that equity and property markets are suffering too. Outside the worst 6 months of the financial crisis, the All Ords is now at the lowest ratio to NGDP it has been since the early ’80s. Four percent NGDP growth is not what we’ve been accustomed to for the last two decades but the RBA seems to be signalling – wrongly in my view – that we should get used to it.

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