The newspaper coverage of yesterday’s Reserve Bank decision to leave interest rates on hold and accompanying statement seems to be at considerable odds to the view from major investment banks this morning.
Newspaper economists took the RBA Governor’s accompanying statement as containing a veiled warning to the Government on spending (AFR), rates (Terry McCrann in the News Ltd tabloids), and rates again in The Australian: ‘RBA boss in rates warning’. The SMH saw the RBA grappling with “uncertainty”.
And it’s not too hard to see that veiled warning given the changes in tone and words in the May statement, especially this passage from the RBA statement:
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“Given the opposing forces at work, considerable uncertainty remains about the outlook for demand and inflation,” Mr Stevens said yesterday. “On balance, the Board’s current assessment is that demand growth will remain moderate this year. “In the short term, inflation is likely to remain relatively high, but it should decline over time provided demand evolves as expected. “Should demand not slow as expected or should expectations of high ongoing inflation begin to affect wage and price setting, that outlook would need to be reviewed.” (Click here for the full statement.)
But from the economics team at Goldman Sachs JBWere there was no sign of “rate rise looms’ in the commentary:
We continue to believe that the RBA has finished hiking interest rates this cycle and that three interest rate cuts will prove necessary in 2009, commencing before mid-year. Our rates outlook is predicated on a prolonged moderation in domestic demand. We suspect that financial markets are currently overly hawkish on the probability of a rate hike in August (45%), reflecting a preoccupation with short-term prices pressures, rather than the medium-run perspective that directs monetary policy.
The thinking at Merrill Lynch was in a similar vein:
This is consistent with our view that the RBA is prepared to look through higher near-term core inflation and accept a gradual return of inflation back to the 2-3% target band. The RBA has signalled that while policy is on hold for now, domestic demand must continue to slow as expected and higher ongoing inflation must not translate into higher wage claims and business price setting. The continued lift in Australia’s terms of trade and the associated boost to national incomes appears the greatest threat to these conditions, in the form of renewed strength in demand in the second half of the year.
(UBS) continues to see a meaningful moderation in demand growth over the coming year – the most significant this decade – though by no means a hard landing. While the dataflow is unlikely to be always soft over coming quarters, we expect enough will be going on to see the RBA remain on hold this year, and inflation pressures ease into end 2008/early 2009. With the global economy likely to still be on a slowing path, we expect moderate demand growth and lower inflation prints to provide scope for the RBA to trim the cash rate (ease the foot off the brake, so to speak) by 50bp in 1H09.
Tomorrow’s April jobs figures and then the second Monetary Policy Statement on Friday might provide more enlightenment. But if three influential investment banks believe there’s little chance of another rate rise, based on what we and the RBA now knows about the way domestic demand is slowing, why the hawkishness in the newspaper commentaries and from other bank economists from the market?