It’s almost as if the Reserve Bank is trolling febrile screen jockeys and lemming-like markets. Not that they need much stimulus to go silly — as Michael Pascoe noted in his piece calling bullshit on the “neutral interest rate” hysteria of the last week, which included much parsing, tea-leaf reading, soul-searching and chin-stroking over the RBA’s indication that rates would return to 3.5% if everything were hunky-dory.
We’re very far from hunky. And dory is not even on the radar. Certainly not if you’re an ordinary household struggling with stagnant wages, a big mortgage and energy prices going up by double digits.
But tomorrow, Reserve Bank deputy governor Guy Debelle will send the alarmists and others in the financial markets and business media off on a new tack when he makes a speech in Adelaide called Global Influences on Domestic Monetary Policy — one that will have the “we should lift rates because other countries are lifting rates regardless of domestic conditions” pundits glued to their screens. And just to add to the excitement, on Monday, RBA governor Philip Lowe will speak about labour market and monetary policy.
The sensible take is that this week’s minutes of the RBA board meeting from July 4, and these two speeches, will give us a clear picture of the central bank’s thinking on the drivers of monetary policy in the current, highly unusual environment — unusual because central banks around the world are thinking about the end of an extended period of “emergency low” interest rates, and unusual because the connection between employment growth and wages growth appears to have been severed, at least temporarily.
That was illustrated by further strong employment growth in today’s June jobs data, which showed trend net employment growth of 26,000 jobs (30,000 full-time minus 4000 lost part-time jobs) and unemployment at 5.6% in both trend and seasonally adjusted terms. Since September last year, there have been nearly 190,000 full-time jobs added — the kind of growth that traditionally would have driven wages growth of 3-4%, but instead wages have struggled to keep pace even with a very low inflation rate.
It’s true that the bank is now taking more notice of what is happening offshore. Debelle will discuss what the US Federal Reserve, the Bank of England, the Bank of Tokyo and the European Central Bank are doing (the Bank of Canada lifted its official rate last week), and likely note that the “taper tantrum” by bond and currency markets is misplaced because inflation is weakening around the world again after peaking in late 2016 and early this year, and wages are also under downward pressure, again. That is, the hawks might have to sit tight for a while longer.
Lowe will speak two days before the June quarter consumer price inflation data is released, which could be a touch weaker than expected (in contrast, the current September quarter will show a rise because of higher energy costs and the usual start of financial year rise in federal and state taxes and fees).
What many writers and economist didn’t get was that July wasn’t the first discussion of the “neutral real interest rate” by the board. However, the July 4 meeting featured a longer discussion, which was reflected in the minutes — under Lowe, there has been a definite shift towards providing more detail and information of what was discussed.
What was missed in the minutes because of the neutral rate hysteria was that offshore events have now been elevated to the same level of importance as the bank’s two main headaches: the weakness in real wages against the gathering strength in the jobs market, and the question of the housing boom and whether the unhealthy lending, especially to investors, is under control. The final paragraph of the July meeting’s minutes read (the important words are in bold):
“Members regarded the improvement in the world economy over the preceding months as a welcome development. Nevertheless, they assessed that current economic conditions in Australia, and the outlook for growth and inflation, meant that developments in the labour and housing markets continued to warrant careful monitoring. Taking into account all the available information, the Board judged that holding the accommodative stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.”
That is, we have noted what is happening overseas, but it doesn’t impact our current policy stance where the labour and housing markets are more important. Recognition of that would have negated much of the silly talk this week. But the hawks believe what’s happening offshore should be more important than what’s happening in Australian households; if other central banks are lifting rates, so should we. It’s the kind of perverse thinking you get from wealthy, privileged traders and commentators insulated from the struggles of ordinary households and Australian businesses.