Board offers a reality check to China alarmists
Leaving domestic politics aside, the global economic headlines last month seemed to be painting a world of continuing crises and substandard growth. As far as our world was concerned, though, those headlines were misleading.
The latest Reserve Bank board minutes start with a much more sanguine view of our trading partners' performance than that portrayed in the popular media: "Overall, growth of Australia's major trading partners in the June quarter was around its average of the past decade and recent indicators suggested that this pace of growth had continued.
"The Chinese economy was growing at around the pace evident since the start of the year and members noted that indications were that GDP [gross domestic product] growth was likely to remain close to the authorities' target of 7.5 per cent over the remainder of the year."
So the parts of the world that matter most to us are running at about their average speed, booms and great recessions notwithstanding. You could be forgiven for having missed that as the China bears and sundry alarmists tend to receive much more coverage than the underlying figures. And this month's RBA board meeting was before the latest clutch of stronger Chinese statistics.
Yes, the capital outflow issue for some emerging markets was noted, especially India, Indonesia, Turkey and Brazil, but even that might not be as bad as some portrayed:
"Members noted that the authorities in these four countries appeared to be less concerned about depreciating exchange rates per se than they were about the speed of the depreciation, partly because of the implications for inflation.
"They also observed that emerging market economies generally had become much better placed to handle this type of pressure than in the past, with most jurisdictions now holding large foreign exchange reserves relative to their short-term debt and having relatively less foreign currency denominated debt than in the past."
And as for the domestic economy, the big bet on housing appears to be paying off. Household consumption, the labour market and non-mining business investment were soft but the pick up in housing is now strong enough to have the RBA a little concerned about certain aspects - that lenders might be tempted to lower their prudential standards and that the real estate spruikers could be causing trouble in the self-managed super sector. The RBA promises to keep a close eye on both, although in theory it is not the relevant authority. Interesting.
As far as the interest rate outlook goes, the minutes underline that while growth is a bit below trend, it's early days yet for the stimulus already applied to have its effect:
"The decision to reduce the cash rate at the August meeting, where the board had judged that the outlook for inflation provided the scope to ease monetary policy further, brought the total reduction in the cash rate since late 2011 to 225 basis points.
"Lending rates had declined to historically low levels as a result, which, together with the lower - though still high - exchange rate, were continuing to provide a substantial degree of policy stimulus to the economy.
"This was most evident in the housing market, with the lags in the effect of policy meaning that earlier actions were still likely to take some time to have their full effect on demand more generally. These conditions would, over time, help the economy negotiate the prospective downshift in resources investment via a switch to other sources of demand. Some further decline in the exchange rate would be helpful in achieving such an outcome."
And that's the conundrum that results in the minutes' final paragraph that tries to leaves the door open for another rate cut even while the bank thinks the economy has bottomed and loose monetary policy is doing its job.
That damned exchange rate is proving stubborn but house prices are up by 7 per cent on their trough a year ago and trending higher. So let's give the jawbone a little wiggle by not ruling out the possibility of another rate cut if the economy needs it , even though that's stating the obvious and when everything else in the minutes indicates there's not likely to be one.
As for the threat of the housing market warming too much too quickly, let everyone know that all the authorities are watching out for excess.
We could be in for a little backroom suasion applied to our lenders well before there's any hint of a rise in rates as the exchange rate mitigates heavily against even considering tighter monetary policy.