RBA still willing to give the transition story time to coalesce

The RBA’s half-yearly testimony had a somewhat more positive tone without going overboard on growth specifics nor on when a more discernible upturn might arrive. (The Bank’s formal forecasts were of course outlined in their quarterly statement earlier).

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RBA still willing to give the transition story time to coalesce

  • Opening statement somewhat more upbeat in tone without going overboard
  • Growth payback in Q2 after strong Q1; don’t be alarmed; early Q3 data encouraging
  • Downplaying growth revisions; their view has not changed materially
  • Warnings on markets under-compensating for risk
  • And under-pricing/ under-appreciating risk of market disturbance when Fed starts to raise rates
  • Asks why the US$ is not stronger, as many central banks are
  • Still frustrated that $A resilience is not able to support economy more but not signalling or warning he’s about to do anything about it
  • Labour market showing some signs of increased labour demand; last unemployment rate reading a “weak one” but issues of interpretation
  • No hints of any policy shift: “stability in rates” expectation until data flow shifts materially

The RBA’s half-yearly testimony had a somewhat more positive tone without going overboard on growth specifics nor on when a more discernible upturn might arrive. (The Bank’s formal forecasts were of course outlined in their quarterly statement earlier this month; those forecasts were downgraded somewhat.)

For me, a key to his tone came when he said that “at some point” growth forecasts will very likely prove to be conservative. He noted that monetary policy is only able to do so much to support growth and that present uncertainty over the outlook was not unusual for this part of the cycle. He noted that a degree of caution was evident globally. While this latest testimony is another one to “talk up” the economy, his hopes on this score seem to have some merit with the recent data flow showing some signs of somewhat more positive growth.

While the RBA has not changed the cash rate since last August, he notes that the search for yield globally has driven down bank funding costs and, coupled with domestic competition, has seen some trimming of mortgage and business borrowing costs, an effective easing in financial conditions without changing the cash rate.

He’s also warned the market not to get alarmed when Q2 GDP is released on 3 September, don’t get alarmed if it’s low or conclude that might draw a policy response. A low print is in the RBA’s forecasts, a “subdued quarterly” figure he mentioned in the Q&A. His statement noted that there will be payback in Q2 GDP from lower exports after a strong Q1 GDP and exports. Moreover, early Q3 data prints suggest a reasonable start. NAB is forecasting 0.4% at this stage and even that requires a little work to get there; it could be lower.

He chose his words on the AUD in the Opening Statement very carefully and there was nothing spicy there: “Admittedly, the exchange rate, another channel through which monetary policy usually has an effect, is probably not doing as much as it might usually be expected to do in achieving balanced growth.” (You can read his Opening Statement in full here.)

After completing his Opening Statement, the Chair of the House Economics Committee asked him about the exchange rate, did he still think it overvalued, what might trigger a decline and so on. He was not really prepared to chance his arm publically on what triggers might precipitate a decline, he repeated his view that the AUD is out of alignment with relative costs adjusted for productivity and Australia’s terms of trade and that it would be pretty surprising if it stayed high for a long period. He said that he was always asking himself whether the market saw something he didn’t, but noted that the risk that it declines at some point remained under appreciated, in his view. Soft jawboning I guess you could call that.

He then launched in his summary of how not only the RBA was watching the US$, but other central banks were and that on previous occasions when the Fed started to raise rates, there had often been a period of market disruption and that the market was paying little attention to this. Not unsurprisingly, he said that Fed would be the first major jurisdiction to hike, way ahead of Japan and Europe, he mentioned. No disagreement on that.

On FX intervention, he said that direct intervention remains in their toolkit, but obviously has not been used to date, the Governor opining about whether the Bank would in any event be successful in front of a “wall of money”. Neither was he signalling what might prompt intervention and was not about to given any warning either.

All in all, the economy’s transition continues to be monitored, is not yet secured, monetary policy has an accommodative stance and the RBA is prepared to give that policy time to work through and hopefully at some stage coalesce with a pick-up in the economy from more confidence. Most of the recent data is a little more positive on that score.

While the transition is not yet secured, there is no hint that they are in any hurry to shift from their current stance of monetary policy.

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