Scope-less RBA?

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The RBA set the cat amongst the pigeons yesterday, by dropping the ‘scope to ease’ section from their concluding paragraph. It now reads:

At today’s meeting, the Board judged that the setting of monetary policy remained appropriate. The Board will continue to assess the outlook and adjust policy as needed to foster sustainable growth in demand and inflation outcomes consistent with the target.

Which sharp eyes have noted is missing the ‘scope for further easing’ line that has appeared in pretty much every statement this year.

The below is from July, for example:

At today’s meeting the Board judged that the easier financial conditions now in place will contribute to a strengthening of growth over time, consistent with achieving the inflation target. It decided that the stance of monetary policy remained appropriate for the time being. The Board also judged that the inflation outlook, as currently assessed, may provide some scope for further easing, should that be required to support demand.

This was exactly the concluding paragraph that i expected, however the market reaction surprised me (higher AUD by about half a cent, short end yields up by ~10bps).

The reason – i do not believe that the RBA has lost their easing bias. At best, they are data-dependent, and expect to cut further. They must be … they are forecasting a long period of below trend growth and sub target inflation, and the expected hand off from mining investment to non-mining investment seems further away following the Q2 capex survey.

So why go to what is clearly a more neutral stance?

I guess it is that no one can forecast capex or commodity prices or the AUD.

Though they did not upgrade global growth in the statement (something i had expected they would do) the risks surrounding each of these categories have diminished with the recent strength of major market manufacturing PMIs.

So while the RBA knows that monetary conditions remain too tight, who knows, there may be a pickup in demand, an increase in prices, or a further drop in the AUD that changes this fact?

At this point their settings are unlikely to stabilise the unemployment rate. More is needed from someplace.

It seems to me that the RBA is buying the USD-stronger story, near the peak and a few weeks before Sep-taper. The market has pretty much priced in the good USD story – i doubt the Fed is going to boost the USD by all that much more. This means that the RBA is unlikely to get the easing via the AUD that they so clearly desire.

Next move remains down – timing is probably H1’14.


  1. yes, Joye’s article on front page of AFR today was interesting. actually blog version below is longer/better. pars 2, 3 and 4 look like they have come straight from the RBA and the rest is joye himself. my take: easing bias remains; local economy soft; global economy stronger; RBA data dependent; and willing Aussie down more. actually, here is something more: “nothing has really changed” from the last meeting is the sense i get from Joye reading between the lines. in past articles Joye looked like he was making a hard effort to signal what was coming from the RBA and what were his views. this time he is more vague. maybe the RBA wants to hedge and retain some deniability, although you can still see what is RBA and what is him, IMO.

    1. I think the RBA is nuts to think something as consensus as sep-taper is going to weaken the AUD. if they want easier monetary conditions i think they are going to have to put the work in themselves.

      And yes, i liked both Joye’s housing note and the RBA note – nice to have him back from national security!

  2. RBA might be scared of what is happening in other south east Asian countries,,,,,outflow of the fund,,,,increase of yields,,,,,,crash of stock market,,,,due to FED Sep-taper,,,,,

  3. It’s a bit frustrating really. Your third last para nails it. They know policy is still too tight, but are hoping for… something…

    A fall in the AUD due to unanticipated and unwarranted Fed tightening would not be expansionary for us.

    The problem with this slow march to zero is that we are gradually hearing more from commentators in the media, the business sector and punters that monetary policy/lower interest rates “doesn’t work any more” for some unspecified reasons. I know the RBA doesn’t believe that, but punters are starting to. That just means the Bank will have to cut by more later to show they are credible in wanting to inflate; just like a central bank with no inflation-fighting credibility would have to raise rates by more than one with credibility, other things being equal. It also means that the next government will have an excuse to cut spending by less than it should. Bad all round.

    In the past, the only time the RBA has gotten traction is when they have engaged in consecutive monthly rate rises or cuts. That shows they are serious. We need to see two cuts in Q4 or else we will go into summer drifting once again, hostage to whatever happens internationally between Xmas and early Feb.

    1. Rajat, have you considered what will happen if housing keeps going and people start panicking they are missing out? Right now I think the RBA do not want to lose control of house prices, even if inflation would allow them to lower rates further if needed. Before we cut rates further we need to follow the RBNZ example on LVR. Look. in both US and Europe you had house prices falling while rates were on the way down. No longer so in Australia now. You do not keep cutting rates while house prices are increasing at 10% p.a. With house prices on the up, I bet data will stabilize around these levels for the rest of the year, including unemployment.

      1. Maybe it will. But we obviously have quite a sticky and laggy housing investment supply response in this country. I’ve said before that house prices needed to rise 10% this year to avoid recession and I think we are more or less going to get there. But I would like to see us in a stronger position going into the mining investment fall-off. Note that lower rates would probably help lower the dollar as well, so it’s not just housing that would benefit. What I always come back to is that without house price growth, you will not see more consumption/retail/services spending and without housing investment or consumption picking up, what will replace mining investment? Exports? I don’t think by enough. And I don’t think house price growth has been excessive since the start of 2008. According to the ABS, the weighted average 8-cities index is not even 15% higher in June 2013 than it was in March 2008. That’s about 3% pa, nominal. Even another 20% rise between now and March 2015 would mean prices have risen 5% pa since 2008. By that time, lower rates would have done their job and could start rising, at which point, house prices would likely drop off or stagnate for another couple of years, etc.

        1. According to RPdata , house prices are now up 4.41% q/q nationally, with Sydney and Melbourne up almost 6% q/q. No sane CB would cut rates on these numbers.The house price growth since 2008 has been minimal because it has been explosive before then and that’s expected. The rest of the economy may need lower rates, but housing shows lowering rates further is risky for future financial stability. Then the answer is LVR caps, like in NZ. We should seriously start considering that or we may repeat the US debacle where rates were cut too much after 9/11 to support the economy which lead to subprime and the GFC.

          1. I didn’t have RP Data figures from 2008 (let alone 2003), otherwise I would use them for sure. It doesn’t change my point though. I don’t agree with LVR caps, as it’s too much winner-picking (would rather see a deposit insurance charge) and it would defeat the/my purpose anyway, which is I think we need higher prices.

          2. “which is I think we need higher prices”
            Modestly, gently higher yes, not booming and then crashing.

  4. Ricardo, what’s your opinion on LVR caps (.e.g. only 10% of house loans can be done at 80%+ for instance) or alternatives?

    1. I like them – i think e lesson of the crash is that if you cannot make a 20% downpayment you probably cannot take a stress event. Also, the rule is simple and harder to arb.

      But i agree with rajat more broadly that the rba is probably behind the curve. More boost now would be most helpful – i just do not think we will get it.

      1. Thanks. I think the two issues are probably combined. If the RBA had more tools at their disposal, they would most likely not be behind the curve on rates. I think the RBA is right in not underestimating what extra low rates could do to future financial stability.

  5. Most banks have a policy that if your LVR is greater than 80% then you must have mortgage insurance. Wayback before the credit crunch let alone the GFC the RBA came down very heavily on banks making loans with little to next nothing in deposits

    1. Apparently 30% of loans in Australia are above 80% LVR.

      Also see this interesting analysis from RPData:

      Mortgage insurance is not nearly enough to cover the risk. It’s basically added to the loan amount and “protects” the banks not the borrowers. Mortgage Insurance for a borrower with 10 per cent deposit on a $500,000 property is about $9000. That’s not even 2% of the loan. If only it would be that simple.
      Actually mortgage insurance does create the illusion that mortgages can become risk free, which is not at all.

  6. From the NAB GDP release analysis just read that dwelling investment recovery ran out of legs in the June quarter: dwelling investment contracted by 0.6% after three quarters of growth to be still up 4.0% over the past year. So are they getting price increases but not construction boost?

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