Today’s April RBA meeting is not of much interest for the decision itself. Futures markets imply a 9% probability of a cut today (and basically only one further cut this cycle).
Markets are, however, keenly anticipating this decision — for they are nervous about the possibility that the RBA will drop their easing bias.
The reason folks are thinking this far ahead is that the RBA spent only a small period on hold at the end of the prior two easing cycles. In these two cycles the period between the last rate cut and the first hike was around six months (in the 08/09 easing cycle the last cut was April 2009 and first hike October 2009; in the 01 cycle the last cut was Dec’01 and the first hike was May 2002).
I think this cycle is different. The RBA was easing rates at the end of 2012 as they were concerned that the end of the mining boom would depress demand. While the most recent Capex data suggests that mining investment will stabilise at a high level in the near term (somewhere between the two SOMP forecasts in the above chart) there’s little reason to think the mining investment will remain permanently elevated.
We are going back to 4% of GDP at some point … which means policy will keep waiting for the end of the boom. It’s also premature to call the end of the easing, as it’s likely that the economy will require additional policy support when the mining investment drop-off arrives.
Thus, all the talk of tightening seems premature.
This cycle seems more like the long easing cycle that began in 1996 — where the first hike didn’t come until 1999. In the 90s, the structure of the economy was changing in a dis-inflationary way (helped by enterprise bargaining — from which we have since taken a backwards step); the looming end of the mining boom is also likely to change the economy’s structure in a disinflationary way.
In any case, in both of these ‘quick reversal’ cycles, there were two obvious positives that are presently lacking: unlike in these cycles, the present prospects for residential and non-residential investment are not especially good.
In 2002 and 2009 the terms of trade were rising and housing was firing due to a mix of government incentives and low(-ish) mortgage rates. We have neither just now. The prospects for mining investment are dimming, and despite some froth at the top end due to microeconomic reform (which has made it easier for wealthy foreigners to buy expensive properties) broader housing — as measured by housing finance activity — remains subdued.
Reflecting this, I doubt that the RBA will drop their explicit easing bias this month. The high AUD (in TWI terms) and falling bulks prices mean that concerns about the end of the mining investment boom will be higher this month. Further, the drop in job vacancies has undercut the confidence one might have had in the labour market following the February ABS employment report.
What I expect from the post-meeting statement:
Global growth: unchanged at ‘a little below average’. The US has been better than might have been feared given the drag from higher taxes (see my note on US consumption). The EU is probably looking a little weaker, given weakness in the Feb PMIs and other timely indicators.
Commodity Prices: i was surprised they didn’t upgrade this last time; Iron Ore and Coal prices have fallen since, so they had the better judgement. They could again leave it unchanged if they please — as prices have run back down to early Q1 levels: they may downgrade.
Financial Markets: unchanged at ‘much improved’. Things are good, but setbacks remain a risk (even Europe wasn’t able to topple things this time via their handling of Cyprus).
Domestic demand: unchanged at ‘around trend over 2012’. We may see something about a below trend end to 2012. They can leave in the bit about green-shoots in consumption, investment and exports. They probably need to say something about the labour market — they’ll probably say that it wasn’t as good as the headlines suggested (my take on the Feb report here, and some more medium term stuff about slack here).
The case for a firmer labour market would have been stronger if vacancies hadn’t collapsed by 6% in the quarter to Feb’13.
Inflation: there has been no new information on inflation. They may tweak the bit about the labour market softening (for even if the Feb jobs report wasn’t 70k jobs per month strong, it painted a picture of a stable labour market which is better than they expected). However, given the drop in the official measure of vacancies, this can await more information. Given this, the outlook is pretty sure to remain ‘consistent with the target over the next one to two years’.
Monetary conditions: Here we get a test for those who claim the RBA has had a ‘tactical’ easing bias — aimed only at holding the currency down. Due to the weakening of the EUR and JPY, the TWI has been to fresh all time highs between meetings. This is despite easing commodity export prices. The interest rate sensitive sectors continue to show the ‘normal’ early signs — though the response is at the low end of the expected range.
Conclusion: the RBA holds rates at 3% and continue to say that the inflation outlook affords scope for further easing, should that be required to support demand.
The easing bias has been conditional on inflation — they ought to wait for more information about inflation before dropping it.