Mitchell says maybe not Nov

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The venerable Chris Joye cut and paste his AFR stable-mate Alan Mitchell’s RBA preview:

It is … easy to imagine why the RBA may refrain from cutting the cash rate again on Tuesday – not because it believes the easing cycle is over but because there is no compelling need to cut for the second month in succession.

One of the key rules for RBA watchers is to listen — but I’m not listening this month. The reason: the Australian economy needs significantly easier monetary policy.

Inflation is running around 2% once supply / policy shocks are taken out, the unemployment rate is rising, job ads are frightening, export prices are tanking, investment projects are being delayed, fiscal policy is about to bite even harder in 2013, and with house prices falling 1% in October and housing credit growth at generational lows it’s difficult to see a developing asset price bubble.

Policy is not even easy. After accounting for spread widening, the 2007 equivalent policy rate is ~5%. And after accounting for the FX i judge that it’s about 5.75%. That is, the RBA’s policy rate is only slightly stimulatory for the interest rates sensitive sectors, and financial conditions are a little restrictive overall when FX is taken into account. If we add on the tightening impact of fiscal contraction at both state and local levels, we can get near 6%.

If the RBA does not deliver the rate cut that’s ~50% priced, the AUD will rise and financial conditions will tighten further. With the underlying economy weakening a given level of the AUD is getting ‘tighter’ as it gets ever more inappropriate given growth.

The best way the RBA can ease financial conditions is to bring the AUD lower by ‘beating the forwards’ and easing monetary policy more quickly than financial markets expect. I think they should do so this Tuesday, and judge that it’s a better than even chance that they do so.


  1. “The best way the RBA can ease financial conditions is to bring the AUD lower by ‘beating the forwards’ and easing monetary policy more quickly than financial markets expect. I think they should do so this Tuesday, and judge that it’s a better than even chance that they do so.”

    But the dollar is not responding to rate cuts. This has been proven several times in the last year. Markets still believe the RBA will be successful in avoiding a recession by cutting rates a couple more times and this is keeping the dollar up. The dollar will not come down significantly unless our economy really deteriorates and markets start believing that the RBA won’t be able to avoid a recession.

    1. well, i guess i’d argue that at the margin higher rates mean a higher AUD exchange rate — but it’s surely less AUD weakness per bps of rate gap thees days.

      1. If they want to see the AUD drop in the medium term, they should NOT cut. Because if they don’t cut, economic conditions in Australia will worsen and the AUD will materially weaken. It is my thinking that we would be better off without a rate cut now, a mildly slowing economy and a lower AUD which will help us avoiding a recession later on. Instead I think they will cut (if not tomorrow, then next time), they’ll keep the AUD high and put themselves in a corner because the economy will never be able to stand a rate hike later on and the high AUD will keep damaging the economy (structurally). There are times where to reach your goal you have to temporarily walk away from it.

  2. Methinks Alan Mitchell is the least of your rate call concerns, Ricardo. McCrann has now come out today with a much more strongly-worded statement, which looks like an attempt to defuse the extremely bizarre article published by Dow Jones’s James Glynn on Thursday. Glynn’s piece really threw a spanner in the works of my own views, although Mitchell and McCrann have put me more at ease. At the very least, Tuesday is shaping up as a cracking meeting…One of Glynn and McCrann is going to be a zero and a hero.

    1. In my experience the journalists are only a true signal when they all write the same story — as occurred prior to the October meeting. Alone, Mitchell is the most reliable of the three, in my view. McCrann has had some very strongly worded mishaps. Glynn is somewhere in between.

    1. I have never tipped a cut or hike that i thought was totally wrong given my economic understanding. I’m not about to start doing so now because a few journalists who get it wrong as often as everyone else are doing so. Perhaps i have the wrong impression as i’m out of the Australia, but this does not seem like the pre-October chorus. Job ads are below the GFC trough, the unemployment rate is rising, export prices are falling — statistically it is very unlikely that we could have an inflation problem.

  3. Policy is not even easy.

    Indeed. Stephen Kirchner has an op-ed in Business Spectator today saying that:

    The only relevant measure of the stance of monetary policy is inflation. The late Milton Friedman often observed that low nominal interest rates are in fact indicative of tight monetary policy because they arise in a low inflation environment.

    Bernanke added to inflation as an indicator in 2003 by including NGDP. Neither is high at the moment. Let’s face it – most media commentators who go on about interest rates know very little about monetary economics. I would like to think the RBA does. But the interview with Pagan and the recent pronouncements of McKibbin worry me because they both give the impression that whatever their credentials in other areas, they are not serious monetary thinkers, or at least not in the context of what the world is facing.

  4. I would add that around the time McKibbin was going around saying contradictory things, my faith in internal RBA thinking was punctured by Glenn Stevens’ “Glass Half Full” speech in June. In itself, it probably brought about the need for at least another 50 bp of easing, of which only half has been given so far.

  5. The RBA doesn’t give any insights to any journalist that they do not say publicly under Stevens.

    Moreover they have a number of people who are as smart as RA. They have a very good idea of how stimulatory monetary policy is.

    I am going for a rate cut as well.

  6. Ha, ha – looks like I might have to eat my words about McKibbin because he supports NGDP targeting! (see just after 40 mins) I still don’t know how to reconcile his various views on either (i) the Australian economy (ie he wants FX intervention to supply shocks caused by foreigners’ higher demand for AUD while at the same time supporting cash rate rises – as if shocks come with a label on them) or (ii) the US where he criticises the Fed for leaving rates at 1% for too long even though neither inflation nor NGDP got out of control in the mid-2000s.

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