The Australian economy is both a relative and absolute oasis amongst the G10 economies at the moment and there is nothing on the horizon that seems likely to threaten this reality. Certainly the RBA has been telling us for months now, probably longer, that they believe in the China/India story and that this will underwrite mining and investment for many years to come.
Over the past weeks we have heard first from Phil Lowe and this week Governor Stevens. We truly believe that the RBA is the best Central Bank in the world given that Australia is in its 20th year of uniterrupted growth without a recession. Given that we have a small open economy with few material trade barriers an exchange rate against the USD that has moved through a range of .4775 in 2001 to .9800 a couple years back to .6000 in the depths of the GFC and now sits at almost .9600. Also we believe their strength lies in the fact that they are comfortable intervening outside their inflation mandate when necessary.
So it is great when the world's best Central Banker at the world's best Central Bank is so frank with his thoughts. Such was the case two days ago when Glenn Stevens addressed the Foodbowl Unlimited Forum Business Luncheon in Shepparton. Governor Stevens did not hide his obvious feeling that things are looking up around Asia saying "The global economy continues to present a mixed picture. In the Asian region, most countries have well and truly recovered from a downturn that occurred in late 2008 and the first few months of 2009. The main exception is Japan. In the bulk of cases, economies are much closer to their potential output paths now than they were a year ago and policies are moving to less expansionary settings."
He was less upbeat about the overall picture in the developed advanced economies calling the outlook "uncertain". But Australia is doing well, "In Australia, growth has been quite solid over the past year, unemployment is relatively low, and inflation has, for the moment, declined. In fact, growth trends have been favourable over several years now in comparison with many other economies."
Markets got all excited and futures and swaps sold off on the strength of Steven's comments particularly where he said "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."
A paragraph later though was where the sting was in the tail for households and market economists when he said, of offshore weakness "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." Pharos emphasis all the way above.
These comments are clearly code for we've been on hold but we still have a tightening bias. We've only been blogging for a couple of weeks but is this really a revelation. Writing in our day job each day we have been reiterating this for months now and believe they have been consistently clear that this is the case. Yesterday's minutes to the recent RBA meeting were not as aggressive and pundits believe that the "new" infomation since then in the GDP release must be the reason for the heightened rhetoric.
But we are not so sure that the RBA hasn't just sought to move market expectations back onto to a more reasonable footing after they (markets) were forecasting a cut sometime this year only a few short weeks ago. But do they really mean a tightening is imminent in October? Clearly a few big Bank economists think so with the NAB and WBC now looking for a rate hike next month. This is really no surprise but 3 year swap traders have pushed rates up 70 basis points in less than a month, no small move. Clearly after Phil Lowes bullish long term speech last week and now Governor Steven's outlook it seems the RBA was uncomfortable with market pricing. Rate markets now better reflect their reality we think but we're not sure October is locked in loaded.
Thanks for sharing the information
ReplyDelete