RBA holds fire in Nov — but the story remains the same

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I was wrong about the RBA easing in November. The RBA held their policy rate steady at 3.25%.

In doing so, they cited “prices data [that was] slightly higher than expected and recent information on the world economy slightly more positive”. The other positive development mentioned in the statement was the improvement in the broader financial conditions, as the global risk-factor compression trade has played out here as well.

A part of the error I could not have got right (I just didn’t see that inflation was higher than you’d expect given the policy changes), and the other parts I missed.

I had ignored the better global data and improvement in financial markets as I had been focused on two things. 1/ the extremely weak job adverts data and 2/ ongoing decline in commodity export prices. The reason I had preferred these is that I feel they give the best fix on the likely path of future inflation (as policy works with a lag central banks must target future inflation).

Anyhow, with regard November, it turns out that I should have just listened to the journalists.

Normally, at this point, I would head back to the drawing board to see where I had made my errors — however just as I drew myself into the house of mirrors to have a good hard look at myself, my email inbox tinkled with the midnight sound of four email alerts.

What’s this?

RBA mouth-pieces saying that nothing had changed, and that December was still a chance. Mitchell, McCrann, Bassanese, and Uren (all of whom tipped the October cut and the November pause) pointed out that the bank retained an easing bias, due to concerns about the labour market, and that the threshold for a cut in December was low. All we need is a bit of soft labour market data.

So where does that leave me on my poor judgement in November?

I would never take the easy way out and say the Bank got it wrong (for the game is picking their thinking), so I’m left concluding that they trust the leading indicators less than I do, but are concerned by the same developments. I guess job ads have been going down for a while now, and the unemployment rate has only recently picked up, so they’d prefer to see further evidence of damage before acting again.

Looking ahead more generally, it seems that the battle lines remain the same. We have a flagging mining boom, due to a declining terms of trade. Investment as a share of GDP probably has about 5ppts to decline as we go from boom to normal, and the challenge is to figure out how to boost alternative sources of demand as that occurs.

The RBA has time to get this transition right, as we haven’t even got to the investment peak — but I think leaving it late is riskier than they think. Once the job losses start occurring and folks lose their confidence, the ‘neutral’ rate starts to fall. And with this outlook, I cannot see that inflation will be an issue.

Anyhow, there’s always the chance that China or someone does something on the demand side, and boosts prices — which will re-invigorate the mining investment boom. Otherwise, it’s possible that the AUD will decline and boost the return on capital (and hence investment) in the weakly profitable and capacity-laden non-mining trade exposed sectors.

That’s not my central case, and not where i think things are going. It’s unlikely that the handoff from mining investment to consumption and residential investment will be as smooth as the RBA or Treasury hopes — and it’s likely that we’re going to need much lower rates to get these sources of demand to fill the mining investment ‘gap’.

As for December — we clearly need something to be worse than they expected … else they would have just cut in November. We will see the new forecasts on Friday when the SOMP is released — but based on what the media is telling us, the labour market data is the key.

An unemployment rate above 5.5% and soft wages inflation might do the trick for December, even if global growth remains stable and financial / credit market conditions remain favourable.


  1. Ricardo, I think it’s probably just a matter of having rates approaching GFC lows already and the board wondering “are we just panicking and doing this too fast?”. Allow some of the coincident data to catch up with the leading data we have. If that happens we move further. Economic numbers in Australia are not always trustable, better to double check.

    1. that’s probably a big part of it. I guess a few unexpected things went better than they expected (financial markets in particular) so that gave them more time to check and see. I still don’t see the inflation in the Q3 data — but perhaps that’s just hubris. when job ads turn up, i’m sure they will feel a lot better about the outlook. i will that’s for sure.

      i do think that this episode make a case for monthly CPI data. We can all argue about what we think is policy and what we think is inflation — but if we had monthly data we’d have 3m of additional information since the policy changes too place in July, and we’d all have a pretty good idea how much of it was real inflation.

  2. I think ssec is basically right about their thinking and Ricardo is over-analysing it a bit – but full credit to you for trying. It strikes me as odd that they ignored more forward-looking data in favour of a carbon tax-boosted CPI, a mild pick-up in asset prices and waiting for next month’s job’s figures. They weren’t so backward-looking during the GFC!

    Thinking about the Lowe speech last week on ‘easy money’ in Canada and Switzerland leading to ‘imbalances’ as well as Stevens’ poor “Glass Half Full” speech in June, I fear that the RBA has become overly concerned about reigniting a housing boom. They haven’t absorbed the lessons of Friedman that low rates are a sign money has been too tight. This is a worry. Maybe not as smart (or as discrete) as OYM has suggested?

    1. Oops, I meant ‘discreet’, as in, it appears they may have been leaking their stance to journos.

    1. that’s not a statistically significant change from last month — but i agree it’s notable that the pain is all being taken by hours worked and the participation rate. if you set hours worked to the 2007 level and the PR to that level as well, you can ‘adjust’ the unemployment rate up to ~8%

  3. A mixed report I think. Employment to population ratio is back at GFC levels. Participation rate is weak. If we had the same participation as in 2009, the unemployment rate would be the same as during the GFC. But overall it is holding up. You wonder however…. weren’t we having the biggest mining boom ever and interest rates at record low levels already?

    Nice graphs here:

  4. RA that is a bit like saying My aunty would be my uncle because…

    1) I know Stevens and the RBA does not leak. The journos are simply reading what we all do.
    2) My guess is they are looking at PAYG and payroll tax data and are saying the employment data will catch up soon.
    3) I am still worried that although real GDP is above trend nominal GDP is below trend
    4) It is easier to raise rates to cut off inflationary worries than the opposite
    5) Glenn said previously he doesn’t like to see rates below 3%. That still holds when the glass is half full!

  5. I am reading the AFR.
    I am completely confused.

    The Macroeconomics figure is strange.
    the major figure for the budget is nominal GDP not real GDP.
    As I have said that has been below GDP for a while.
    how does he get his 415b figure from?

  6. RBA forecasting CPI at 3¼ in June 2013 in the latest SMP…. why would you cut rates further if that is your forecast?? Yes, it’s due to one-off, etc. etc, but once again they forecast inflation to go above their 3% top range. They really can’t rein in inflation, can they? If one assumes most of the inflation is going to be caused by domestic inflation, not by imported inflation, are they expecting 5% domestic inflation??? This is not going to end well people. For how long can we afford to have domestic inflation running significantly higher than imported inflation?

  7. It is the underlying inflation rate you should be looking at not the headline rate

    1. Underlying at 2¾ by June 2013 in their forecast do not warrant further cuts either, especially with headline at 3¼ … unless their forecast is wrong of course!

      1. yeah, so that’d be 2.5% ex carbon (see the Q2 SOMP for their estimate of the carbon boost).

        basically, assuming steady policy, they are forecasting on target inflation. so yep, they are only going to ease further if things turn out to be weaker than their forecast.

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