RBA sees policy gaining traction

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The October RBA Statement had only a few changes from their September statement.

Overall, my assessment is that there is one big change, and that is to the financial conditions paragraph. The addition of a line that savers are taking more risk on the asset side amounts to an assertion that the influence of prior easing is still increasing. Risk taking on the asset side is one of the key channels through which monetary policy works (lower risk free returns, and folks will demand fewer low risk assets, and the flow of funds into riskier investments will boost growth).

The fact that households have been unusually careful this cycle is a part of the reason we have an unusually low cash rate. If behaviour changes, the RBA’s 2.5% cash rate is going to start feeling very stimulatory. The recent pickup in the housing market is the most obvious manifestation of this change.

The other changes were minor. The sentiment upgrade in the domestic economy section is mostly just a mark to market on the data change (the RBA doesn’t rate these surveys all that highly); and the claim the the Fed raised volatility is just plain wrong if you are talking about implied vols (and if you are not, you should be).

The removal of the comment that FX is ‘still-high’, despite the fact that it’s up ~5ppts was a bit odd. Whatever that RBA’s intention, doing so seems to open the upside for AUD, as the RBA no longer seems to be capping it was the (implied) threat of rate cuts if it gets too strong.

Here is my assessment by category:

global growth: no change, still below trend with a pickup expected.

commodity prices: no change, still down a bit but high relative to historical norms.

financial conditions: downgrade; the fed’s no-taper led to higher volatility (excet it didn’t, implied in FX, rates and equity options all declined).

domestic economy: upgrade, on a sentiment improvement (post election bounce? Or something more lasting?).

Financial conditions: upgrade, savers are taking more risks with their investments.

FX: neutral (weird), the decline was reduced 5ppts to 10%, but oddly they lost the bit about it being still-high.

Conclusion: unchanged, word for word.


  1. The bit I don’t get is when they say: “A lower level of the currency than seen at present would assist in rebalancing growth in the economy.” That suggests to me that they still think conditions are still too tight. Otherwise, they’re picking winners (exports over consumption/housing).

    The RBA has been mighty lucky in my view over the last 12 months. First, QE3, then Abe/Kuroda, then China bouncing back, then no taper. I think they have pretty much allowed international conditions to dictate local conditions and it just so happens that international conditions have been more favourable over the last year than they were in FY 2011/12. I’m convinced that the only time the market takes the RBA seriously is when they do a double tap, up or down. They did that mid-last year and that pulled us out of a deepening mire. They’re certainly the lucky central bank in a lucky country.

    1. I didn’t get the changes to the FX part either. Perhaps they felt that with stronger global growth they could handle a higher AUD?

  2. I read in the paper yesterday that the Govt is looking at investing more in infrastructure to pick up the slack. And BREE is forecasting prolonged slow growth as mining investment falls off. I think they have been saying this for a while, but still, the RBA’s tardiness is really increasing the risk of boondoggles happening. Yet no one is holding them to account. And kouky Koukoulas is now suggesting rates will rise in 1Q2014. This is just madness.

    1. Seems premature to me. I think that you would have to believe in mining ever-boom to have a q1 hike view. I agree with him that things are turning up, but a long period of flat rates seems more likely to me. RBA may ‘do an RBNZ’ and allow a period of rising unemployment and low cpi given that the housing market is gunning.

    1. I am here ! :)

      I think nothing has changed fundamentally. The confidence thingy is just due to the new govt and will last only a few months. The housing bounce in Sydney is long due. With record low rates, this was to be expected. What counts is the next year. I personally do not even believe we have a housing shortage. And I do not think higher prices will stimulate more construction, or not enough to replace mining. Again new housing has gone completely unaffordable. Maybe it was affordable in an environment where existing dwelling prices were doubling every 10 years. Not anymore.

      I can’t see the RBA raise rates in a world of deflation / low rates. They’d be the only CB to do that. That would send the AUD back up above parity straight away and nominal GDP back down again. Have we forgotten that unemployment is still forecasted to go higher from here? From now on I will only follow broad money and credit growth: rates will not move until those numbers change. The risks are still more to the downside IMO, e.g. in the next 6 months: stable rates 60%, decrease 35%, increase 5%. All depends on China obviously and commodity prices.

    2. one more thing! Share market has not recovered previous peak yet and looks toppy already. Housing just there now in some cities only. And rates are at record low already. Mostly due to high dollar.

  3. You all might be interested in Stephen Kirchner’s article in the Fin yesterday against macro-prudential controls in relation to housing.

    1. Interesting.

      “The RBA should not conduct monetary policy on the basis of house prices any more than share prices. The historical record of central banks taking an activist approach to asset price cycles is nothing short of disastrous.”

      RBA should control risk and guarantee financial stability not asset prices. Look at the subprime disaster happening under the nose of the feds in the US… they were asleep at the wheel. If prices go up and people can afford it, that’s fine. But if prices go up and people cannot withstand a few rate hikes from here or unemployment going up to 8%, then risks should be mitigated by the RBA; like any other central bank, they should intervene. And they will, if house prices keep going next year. they will not be able to increase rates, like in NZ, but they’ll need to find other ways.

      “This would be a return to the bad old days of quantitative controls on lending that resulted in non-price credit rationing and was particularly harmful to low-income borrowers looking to enter the housing market for the first time.”

      This is incorrect. What harms them is house prices going up to 6 or 7 times salaries, in part because of investors receiving subsidies in the form of CGT discounts and negative gearing deductions. According to the author the problem is not that house prices are stupidly expensive, but rather that people who can not afford them should be given unaffordable mortgages. What happens then if prices go down and they have these huge mortgages to repay in negative equity? Will they be happy to have a 95% LVR mortgage? Have we forgotten what has happened in the US just 5 years ago, where everyone, even people without a job were given a mortgage?

      “Investors play a particularly important role in supplying the rental market. The dwelling stock, including rental housing, must ultimately be owned by someone. Reducing incentives for investment in housing will do more to harm housing supply than limit demand.”

      Then negative gearing and CGT discounts then should only be applicable for new construction, not for existing dwelling. If investors push up prices because they get a tax advantage from owning and renting a property, they push up the cost of existing stock, not stimulate construction at all.

      1. Have I said this before? My view of the macroeconomy is basically Say’s Law + nominal wage rigidity. When NGDP is growing at typical rates (say 5-6% in Oz context), then Say’s Law should operate – the labour market should clear (subject to whatever rigidities governments create) and the supply-side will basically produce what people want. But if NGDP growth is slow or negative, we need expansionary policy to get people doing what they would be doing otherwise. So if low rates push up house prices before stimulating consumption and housing and other types of investment, then I take that to mean there is an underlying strong demand for housing and an underlying weak desire to invest in manufacturing or other traditional types of ‘approved’ spending. I don’t think looser mon pol distorts what people would do if nominal wage rigidity did not exist.

        I don’t get the idea that higher house prices mean that the RBA can’t raise rates. Perhaps it means they won’t need to raise them by as much – which I can’t see being a bad thing – but the idea that rate rises become somehow off-limits confuses me. If demand is too strong, then policy can and should be tightened. Growing household leverage did not stop the RBA from raising rates as needed over 2002-08 or over 2009-10.

        1. Rates and monetary policy can’t replace everything else. For instance, rates in the US could not prevent the subprime mortgage crisis. I am just saying that there should be checks in place to make sure banks are lending responsibly. Because should things get harder eg UE going up to 8% or higher we’ll want an economy that is fundamentally strong. In a recession occupancy rates go higher, some of the investors lose their jobs, house prices go down, negative equity etc. Who is making sure our economy is ready, should hard times come by and we are not overleveraged and unable to repay our debt which will only make the recession even worse? The RBA?

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