The “rate rise looms” analysis of every Reserve Bank speech and report was evident again this morning. What will they do with several speeches and reports and statements from the central bank in the next 4-6 weeks?
After governor Glenn Stevens’ speech yesterday, we had the minutes of the September board meeting issued this morning, we then have the second financial stability for the year on September 30, the next board meeting on October 5 and a statement; a speech by financial stability department head Luci Ellis on October 6; a speech by the deputy governor Ric Battellino on October 8; the minutes of the October board meeting and then major speeches by the head of the financial system, Malcolm Edey, and then by Stevens on October 20 and 25 respectively.
By the time that run of public commentary is over, the “rate rise looms” mob will have run out of words, or they will have merely retuned their usual guff for the board meeting on Melbourne Cup day, which could see rates rise, especially if the September quarter’s CPI, out on October 27, is poor.
But the bank could quite easily boost the cash rate when it’s least expected. So try October 5. Those four speeches after that board meeting, including one each from the governor and his deputy, tells us the RBA sees the need for public discussion of where the economy is headed.
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One of the oddities of reporting on what the Reserve Bank and its senior officials say each month is that each utterance is treated as “new” news when in fact they are quite often part of a continuing narrative. Led by news agencies such as Reuters, Bloomberg and AAP, every speech, bit of data (this applies to major ABS releases as well), is automatically framed in terms of the cash rate and whether it could rise or not.
That’s because these agencies’ most immediate clients are not the Australian newspapers, TV and radio, but the various clients in the financial markets. They hate context, just want the top line. Nothing else matters. Context can be supplied at a later date, if needed.
Take the treatment of Stevens’ speech in Shepparton in Victoria yesterday. Even though it was arranged nearly a year ago, some chose to treat it as a commentary on the rediscovery of regional Australia because of the importance of those Independents after the August 21 election, others treated it as a new warning that rates will/could rise. It was actually another opportunity for him to caution us on the dangers of inflation, cost pressures and the resources boom.
In fact, it was all that and a bit more. I bet that Stevens would have made roughly the same comments about the distribution of the benefits of the resources boom across the country and the application of monetary policy even if there had been no poll, or a different result had emerged.
The RBA is not a strong believer in the two-speed economy thesis and yesterday Stevens went out of his way to give examples of how the resources boom was benefitting the rest of the country. He and other senior officials have made similar comments off and on since 2006-07.
But by doing that you can see how inflation has moved from not being a concern in the bank’s central forecasts for the economy back in late July/early August, to returning to the primary area of interest from the September board meeting onwards when the post-meeting statement from Stevens included the qualifying words that monetary policy was appropriate for “the time being”, whereas it had been merely “appropriate” in the statements in June and July.
“Even with continued caution by households, that probably means that overall growth, which has been at about trend over the past year, will increase in 2011 to something above trend. We think that means that the fall in inflation over the past two years won’t go much further.” … “But if downside possibilities do not materialise, the task ahead is likely to be one of managing a fairly robust upswing. Part of that task will, clearly, fall to monetary policy,” Stevens said yesterday. And by the way, it was the second use of the word “robust” to describe the expected strength of the economy next year and in 2012, the previous use was in the Monetary Policy outlook on August 6.
A couple of writers referred to a speech made last Thursday by the head of the bank’s economics department, assistant governor Phil Lowe when he said:
“Given that there is currently a relatively limited amount of spare capacity in the economy, the risk of upwards pressure on inflation would be increased if investment and consumption were both to increase very strongly over the next few years.”
But there was no mention in the reports of comments made in a Brisbane speech on election eve, August 20 by Battellino.
“One issue is whether the strength of the economy will have implications for inflation. At present, underlying inflation has fallen back into the top half of the target range after rising noticeably over the second half of 2007 and 2008. We expect that it will stay around its current rate for the next year or so but, after that, upward pressure on inflation is again likely to emerge with a strongly growing economy. History tells us that inflation can be a problem during resources booms, and while there are grounds for thinking it will be less of a problem this time than in the past, we need to remain alert to the risks.”
Those comments are closer to those from Stevens yesterday, and yet they just disappeared.
And back on August 6 in the third Statement of Monetary Policy for the year, inflation was important, but the likelihood of a breakout wasn’t quite the hot topic it now is. In its outlook for the economy, the bank listed as one of the upside risks to its forecasts.
“It is also possible that domestic private demand could be stronger than forecast, particularly if firms in the mining sector attempt to push ahead with investment more rapidly than assumed in the central forecast.
“This would result in capacity pressures in the construction sector and the broader economy. In addition, the current cautiousness in spending by households may not persist and the forecast modest increase in the saving rate may not occur, particularly if the unemployment rate continues to trend lower and consumer confidence remains at elevated levels. If these risks were to eventuate, inflationary pressures could build more quickly than expected under the central forecast.”
So now inflation seems, in the bank’s opinion, to be capable of building “more quickly than expected under the central forecast”, hence its elevation in policy importance.
The RBA no longer expects consumer demand to be as subdued as it seemed a couple of months ago, nor does it see the rising Australian dollar pressing down on import costs to pressure inflation. Domestically generated cost pressures, labour shortages and a rising level of demand for cement, concrete, steel and other products is in the pipeline. So the red flag has been raised.
Sure “rate rise looms” will continue to be the easy headlines, but the bank could quite easily boost the cash rate when its least expected. So try October 5. Those four speeches after the meeting, including one each from the governor and his deputy, tells us the RBA sees the need for public explanation, either of a decision made, or one about to come.