RESERVE Bank governor Glenn Stevens unaccountably declined to take the advice of JP Morgan's Helen Kevans and Henry Thornton's, well, Henry Thornton, and left the official interest rate unchanged. In the fullness of time we'll see who's 'right'. I'm prepared to put my money on Stevens.
On both the 'predictability' and 'outcomes' bases. Thornton et al must have 'predicted' at least a dozen of the last half-dozen rate rises. If not demanded them.
Fortunately, they've been variously wrong or unlistened to. Otherwise we'd be looking at a jobless rate of who knows what, but considerably higher than the one we have; and a generally smoking ruin of an economy. It's now on to the end of July in both a specific rate change sense and the future of rates and the economy much more broadly.
The Consumer Price Index - the basic inflation figure - comes out on July 25. It will essentially tell us whether we will get a rate rise before the election. But we will have to wait exactly two weeks, until August 8, to find out whether what we were 'told' is correct.
That's when the result of the Reserve Bank's August board meeting surfaces at 9.30am, just as July's did yesterday. There's a very simple and a broader truth about why there was never any prospect of a rate rise out of the RBA yesterday.
Every, and I mean every time the RBA has initiated a rate rise in what I term the 'modern era' - post 1996 and Peter Costello as Treasurer and Ian Macfarlane as RBA governor - it has come immediately after CPI figures. The last time this was possible was at the May meeting after the release of the March quarter CPI at the end of April. Further, the RBA doesn't move just on 'the CPI figures'; there has to be real evidence of an existing or gathering inflation threat.
It looks for that in underlying measures of inflation, and it looks to the clear evidence in those figures as providing public justification of any rate action. Even though, precisely because it is, really trying to gauge tomorrow inflation. At the May meeting it had no 'smoking gun'.
Underlying inflation fell to an unthreatening 2 per cent annual rate. Trust me, it's not aiming to screw it down to zero. It's also worth repeating, endlessly, that in focusing on underlying inflation, it is precisely not 'going bananas' or 'sniffing petrol'.
It is not, never has, and never will, raise rates because of the boost to inflation from something like the banana shortage or a (temporary?) spike in petrol prices. Now Stevens has made it crystal clear the RBA does not go 'on hold' in election years.
It self-evidently couldn't -- that would mean monetary policy not working one year in three. Apart from the fact that I believe we don't employ Stevens and his colleagues to only work two years in three; that would also fundamentally destabilise monetary policy in those two years bracketing the election year. For example, it would likely mean excessive rate rises after an election - the monetary policy equivalent of those tough post-election budgets; and then recession-fighting excessive rate cuts.
That said, Stevens would want slightly stronger evidence in supporting/explaining a rate rise the closer we get to an actual election. That's to say, he would at the very minimum want some CPI numbers. Hence the no-brainer of why no rate rise this week.
And he would want some pretty strong evidence in those numbers. In short, in a month's time he would have to see underlying inflation accelerate to at least an annualised 3 per cent. If it's still around 2 per cent, forget it.
If there's no rate rise the next stop is the November RBA meeting on Cup Day. If the election had been held in October, business as normal. If the election was coming in December, it would require the mother of all inflation surges.
Just a 'normal' surge and action would be postponed to manana, in December. If the election was in November, Stevens and Co would figuratively or literally take a Cup break. On the broader front, might he - should he - be acting pre-emptively, even though there is no sign of underlying inflation accelerating, because the economy going gangbusters and the inflation dam is likely to burst?
That's broadly the Thornton line - and indeed the attitude of most of the other market economists. You've got to be blinded to the rise and rise in the Aussie dollar. It's hit US86, it's almost certainly going past US90 and could quite easily get to $US1.
With qualifications, that acts like rate hikes already of at least 0.5 per and by later in the year 1 per cent or more. More holistically; that view comes from continuing to look back into the 20th century.
China has changed everything, including the conventional inflation parameters. Yes, the economy is going at full pelt. But no, that does not necessarily mean inflation the way it used to.
Tackling non-existent inflation would not only be self-evidently pointless, but pointlessly destructive. What is this? Post to del.
icio.us Post to Newsvine Also in Business RESERVE Bank governor Glenn Stevens unaccountably declined to take the advice of JP Morgan's Helen Kevans and Henry Thornton's, well, Henry Thornton, and left the official interest rate unchanged.
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