Primed for in­ac­tion

Townsville Bulletin - - NEWS - TERRY McCRANN

THE Re­serve Bank did not spring the “July sur­prise” pro­moted by overex­cited mar­ket play­ers and re­tailed by over­gullible jour­nal­ists, es­pe­cially at The Aus­tralian Fi­nan­cial Re­view, and as I noted yes­ter­day, never would.

Ah well, at least it made for some good trad­ing: the Aussie firmed to­wards US77¢ run­ning down to the RBA’s “ex­pected” zinger at 2.30pm, and then dropped straight back to­wards US76¢ on the an­o­dyne re­al­ity.

In­ter­est rates – cor­rec­tion, and both an im­por­tant and very rel­e­vant one, the RBA’s of­fi­cial in­ter­est rate – is firmly on hold ( at 1.5 per cent). The RBA is com­pletely dis­in­clined to change it any­time soon or in­deed sig­nal any in­ten­tion to change. Ab­sent “events.”

The sur­pris­ing thing is that any of this should have been the slight­est bit sur­pris­ing, just be­cause some of the ma­jor cen­tral banks have started to sig­nal they might start to con­sider rais­ing their rates.

In­deed, that is pre­cisely what our RBA wants to see hap­pen. More specif­i­cally, it is the ex­pec­ta­tion of those higher rates – es­pe­cially from the US Fed – that has been, and con­tin­ues to be, the ab­so­lute ba­sis of its de­ci­sions ( now 11 in a row) to leave its rate un­changed.

This has been the case at ev­ery meet­ing presided over by cur­rent RBA gov­er­nor Philip Lowe since he took the chair last Septem­ber, and was put in place by his pre­de­ces­sor Glenn Stevens at his last meet­ing ear­lier that month.

In sim­ple terms, there is noth­ing in ei­ther what has been hap­pen­ing in the world, or how the RBA sees its task, to sug­gest a change of pol­icy course, or the need to “prep the mar­ket” to a po­ten­tial change.

In­deed, in con­trast to events in 1945, the sit­u­a­tion has de­vel­oped ex­actly to the RBA’s ( and Aus­tralia’s) ad­van­tage. That’s both the broader global sit­u­a­tion and the do­mes­tic mix of eco­nomic and fi­nan­cial con­di­tions.

Pre­sum­ably Lowe will de­tail all this – and so the RBA’s pol­icy po­si­tion ( as I would put it, of “ac­tively do­ing noth­ing”) – when he ven­tures south to ap­pear be­fore the fed­eral par­lia­men­tary back­bench eco­nomics com­mit­tee in Mel­bourne later this month.

As I’ve pre­vi­ously de­tailed, there are two di­a­met­ri­cally op­posed views of where “we” – the world, broadly – are headed.

One sees the world cas­cad­ing over an­other precipice ev­ery bit as steep and with the land­ing zone ev­ery bit as jagged as that of the GFC, when the multi- tril­lion- dol­lar debt- fu­elled global share and prop­erty bub­bles blow up.

The other sees a broad, solid if un­spec­tac­u­lar, low in­fla­tion global re­cov­ery spread across all the world’s ma­jor economies: the US, Europe, even China and Ja­pan. The ma­jor in­ter­na­tional agen­cies and the ma­jor cen­tral banks have signed on to this view. So also has our RBA.

That is the be­nign ( ex­pected) global back­drop to the RBA’s do­mes­ti­cally fo­cused op­ti­mism: broadly, eco­nomic growth pick­ing back up to and ex­ceed­ing the key 3 per cent level and in­fla­tion mov­ing back into the ( RBA de­sired) 2- 2.5 per cent range.

Yes, if that all comes to pass, the RBA’s of­fi­cial rate will rise. But not the eight times only sug­gested ( not fore­cast) by for­mer RBA di­rec­tor John Ed­wards. And more im­por­tantly, not start­ing now or any­time soon.

Apart from the ob­vi­ous point: th­ese are as yet un­ful­filled ex­pec­ta­tions of the fu­ture, three rather crit­i­cal points ar­gu­ing against any early move or in­deed, the sig­nalling of any move.

One, as we saw with Bendigo yes­ter­day, the banks are push­ing up their rates any­way. And in a way that does the RBA’s task for it on both macroe­co­nomic and macro­pru­den­tial fronts.

Two, we are start­ing ( thank the Lord, or bet­ter still, Stevens) at 1.5 per cent; the Fed started from zero and the Euro­pean Cen­tral Bank is still yet to start, from be­low zero.

Af­ter four hikes the Fed is still be­low our RBA rate ( and the RBA wants it to go above it, to keep the Aussie in the low US70s) and the ECB hasn’t even started yet.

Three, there is noth­ing in the do­mes­tic mix – in­fla­tion, wages, busi­ness in­vest­ment, con­sumer spend­ing, even Mel­bourne- Syd­ney prop­erty prices – that de­mands higher in­ter­est rates ( over and above the ones the banks have tar­geted on in­vestors).

This all makes the RBA very com­fort­able at sound­ing like the prover­bial bro­ken record af­ter ev­ery meet­ing. But to also re­peat my­self: cir­cle ( in or­ange) Cup Day.

Philip Lowe.

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