March RBA — slightly less dovish

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The March RBA statement contained only a few tweaks, and in many ways it was notable for what the RBA did not do.

What they did do was leave the clear easing bias in place, and in particular the final paragraph was totally unchanged (which as McCrann notes, is unusual).

Have we seen the final cut?

Maybe, but i doubt it, and moreover the RBA does too. I think it better to keep saying the next move is most likely to be down when the RBA thinks the same than to flip a coin early and ‘get it right first’. Still, my expectation is that we may price out all the cuts before we see the next easing (and that’s the direction interest rate markets went yesterday).

Where the RBA did make changes, they generally showed more confidence that the dynamic they had expected following their prior easing was beginning to play out.

On that note, they bumped their assessment of the housing market up to ‘slowly increasing, with higher dwelling prices and rental yields’, from ‘there are indications of a prospective improvement in dwelling investment, with dwelling prices moving higher, rental yields increasing and building approvals higher than a year ago’.

Similarly, the outlook for non-mining investment was also given a tweak, moving to:

The near-term outlook for non-residential building investment, and investment generally outside the resources sector, is relatively subdued, though recent data suggest some prospect of a modest increase during next financial year

This change is basically the addition of ‘though recent data suggest some prospect of a modest increase during next financial year’, to the end of the prior assessment.

This is where the upgrades stop. They might have done more…

The RBA might have put more weight on the fact that mining capex intentions look a bit better for 2013-14 than they had expected, but they didn’t.

They might also have upgraded their financial market assessment … but they didn’t. Despite the fact that Aussie equities are up 5% since their last meeting. The price action understates the performance of risk assets – they have done well despite the US sequestration, and Italian election ‘risk’.

Finally, the RBA’s own index shows that commodity prices were up firmly in Feb, but they did not upgrade that assessment either. Rather, they left it flat saying that ‘commodity prices are little changed recently, at reasonably high levels’.

On the dovish side, there was a tiny tweak to the inflation assessment – basically noting that the data had confirmed their judgement that a softening labour market was keeping wage costs down.

All in all, the RBA tried very hard to say ‘things are developing as we expected’.

For the first time in a while, there is upgrade potential relative to their outlook, particularly due to the financial market led easing of financial conditions — however, with the mining boom yet to end, i still think the next move (whenever it is) will be a cut … But that might be 2014’s business.


  1. I found this part surprising: “The near-term outlook for non-residential building investment, and investment generally outside the resources sector, is relatively subdued, though recent data suggest some prospect of a modest increase during next financial year”. Which recent data suggested some prospect of a modest increase during next financial year? Not the capex numbers.

    The final paragraph signals they think another cut is needed sooner rather than later, if they thought a cut was coming only in 2014, they would have changed the wording, don’t you think?

    Overall the RBA is still not trusting the positive data we got in Jan/Feb and want to have more firm data on demand for 2013.

    1. Yeah, sure — they cannot forecast that far out with confidence, but what they can ‘see’ suggests that more easing may be needed. The point i was trying to make was that even if you add in upgrades they didn’t make (to financial markets, commodities, capex) you just delay the cuts — unless you get rid of the capex drop-off.

      1. Yes, I suspect they’ll have to change the final paragraph if they do not see any more cuts for now in 2013, but they’re probably mindful of the AUD too.
        The RBA easing bias is what is sustaining share prices and keeping AUD in check: it’s our version of QE! We’ll probably have RBA easing bias to infinity :)

        1. Nah, the aussie equity rally is part of a Global re-rating. Global equity and credit have all re-rated together since mid 2012. If anyone is behind it, it’s draghi + ben. But the recent aussie equity outperformance may be rba related (lower rates and fx)

      2. The moment the RBA drops the easing bias (or even remotely starts talking about rate increases), AUD starts appreciating fast, bank shares drop, the ASX 200 stalls.

        DOW y/y (+9%)
        ASX200 y/y (21%)

        The performance difference is the RBA rate cuts.

      3. ssec, don’t forget the BoJ action. The Nikkei is up 22% yoy and 14% ytd. Shanghai had also risen a lot until recently; they’re still up more than we are over the last 3 months. It makes sense for our market to perform mid-way between US and Asia.

      4. Yes, you are right, Nikkei out performing too because of Yen weakness… it’s all about forex, currency war and central banks in the end!

    2. I agree the capex numbers didn’t show evidence of a pick-up in non-mining non-residential investment. The data for residential investment and credit growth are also pretty flat. The RBA’s approach is working out ok so far thanks to the strength of the equity market, which is an international phenomenon driven by easing elsewhere. Because of this, I disagree with the notion that the ‘full impact’ of the RBA’s easing is yet to come through. Monetary policy works a lot faster than people think. If the global rally falters, they will need to step in quickly.

      1. Seems we are slightly apart on capex, but two peas on the equity market doing their easing for them and the potential fragility of the situation (ie RBA must come in if it falters).

      2. Ricardo, I fully defer to others’ expertise on capex. I was just agreeing with ssec about the ‘other’ and ‘manufacturing’ capex from the survey, which looked terrible.

  2. Very good article from CJ on bank liquidity:

    “The RBA claims there is a difference between an “illiquid” and an “insolvent” bank, and the new facility, which could be as large as $380 billion, will be made available only to “solvent” institutions.” RBA: this is rubbish. Banks should simply not become illiquid. Period. If you become illiquid, you are insolvent.

    1. Seems his numbers on non-foreign owned bonds are wrong.

      As of Q4, in market value terms, the foreign sector holds ~200bn of the ~274bn term bond market – meaning the non-foreign float is 74bn (he has 118bn). We have semi data to Q3 and that shows holdings of ~78bn, against a market size of ~212bn, leaving ~135bn of non-foreign float (he has 56bn).

      Since central banks have worked to make the currency elastic, we have had lower inflation volatility and better macro performance. Part of this has always been lending against good collateral in difficult times. That is why banks are supervised – supervision is the cost of this insurance / special liquidity facility.

      I for one like this old arrangement, and see the CLF as a natural development that is in keeping with it. It does put more pressure on supervisors to get it right, but at least it makes the nature of what is going on (insurance by the taxpayer) and the cost (the CLF fee) explicit. If they get it wrong we can always move the fee and the haircut.

      1. But it does not make sense for banks to hold too many assets, even if high quality, that can’t be made liquid during a crisis and instead rely on public support (= private gains in good times, public losses in bad ones). I thought that was the exact principle behind Basil III new capital requirements. A well managed bank should simply be able to withstand a crisis without any external support. For instance holding more counter-cyclical assets, hence lower earnings in good times.

        1. That is the idea, but in practice the CB would always liquify them quietly via the discount window.

          Imagine if word got out the CBA liquidity book had sold 20bn of govvies – it would cause a panic.

          So all this is about is setting the collateral that the taxpayer will take in a crisis.

      2. OK, if we must have public support for banks, then banks must be VERY WELL regulated (e.g. Basel III and more) and transparent. The cost of public support should be obviously cheap and available during the crisis but very expensive for the bank once the crisis is passed. Private gains with public support should simply not exist.

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