Rates: All Quiet Until September

Back in April, the balance of money market expectations of an interest rate rise was tipped over by one man '” Macquarie Bank interest rate strategist Rory Robertson. And his warning that the RBA could move as early as May was proven correct.

Today’s Australian Financial Review survey of economists finds that the majority tipping another rate rise before the end of the year '” a broad forecast that only mirrors money market expectations. So for a closer feeling for the monetary policy outlook, we sought out Rory Robertson this morning.

As you can see in the attached video, Robertson is well short of being an interest rate hawk and if there is a rise in the offing, he feels there’s a better chance of it happening in September than August. The announcement of the next RBA governor could be a factor in the delay.

Robertson is a former RBA economist who made an international name for his understanding of central banks by being well ahead of the pack in tipping Federal Reserve monetary policy while resident in New York for Macquarie Bank.

Back in Sydney, he still keeps a close eye on the Fed and has been tipping for some time that its string of rate rises was due for a pause. This morning he says Friday night’s payroll figures pretty much guarantee the pause is on.

Meanwhile, the markets are taking it for granted that the Bank of Japan will increase its rates from zero this Friday. There’s a tendency to try to make a big deal about this, but Robertson says it doesn’t matter much to Australia.

Further, he suggests the Bank of Japan will also tread very carefully. Japanese employment and core CPI growth are barely positive on a year-to-date basis while wages growth is actually slightly negative. Japan’s pleasing economic growth has been coming from productivity gains with little inflationary pressure.

The danger for investors of late has been a tendency for the steady diet of media interest rate stories to build a fear of sharp rate rises. Certainly, the climate has changed from one of robust central bank stimulus, but it’s now one of neutrality rather than constraint.

As Robertson observes, despite Australia being overdue for a recession, there is nothing in the pipeline to suggest one is around the corner. The long, golden investment summer continues.

The interview

Michael Pascoe: The Financial Review survey of economists this morning finds that most of them think there will be another interest rate rise here within six months. Are they right?

Rory Robertson: The case is building, although the Reserve Bank is very cautious in delivering rate hikes. The Reserve has hiked six times in the past four years so it’s been in no great hurry. The way it works is the Reserve monitors all the data on the economy, the strength of jobs, the strength of retail sales and so on and then lines that up with whatever evidence there is of inflation in the quarterly CPI reports. So you have the quarterly CPI report on July 26 and I think that will make or break the case for tightening either in August or September.

It sounds like you’re saying it’s not a sure thing though.

No it’s far from a sure thing. The case is building. We’ll need to see some disturbing news on inflation, I think, to get the case over the line for a hike in August or September.

Are you expecting disturbing news on inflation?

No not particularly. I think we’ve had low and stable inflation for many years. I think it’s hard to break that. We’ve seen some signs that wages growth, though elevated, hasn’t really accelerated in the last few quarters.

The August meeting is an interesting one. It’s probably Ian Macfarlane’s last as governor. Does that matter?

Well the changeover of governorship happens once every seven years. In this case once in a decade. I think that the Reserve Bank is very keen for governor Macfarlane’s deputy, Glenn Stevens, to take over so it’s an awkward one for the bank in that the announcement for the September changeover might come in mid-August and they were meeting in August, so I’m not sure if the Reserve Bank will be rushing out to disturb things in August. I’m more inclined to talk about an August or September timing because if I were the Reserve Bank I wouldn’t be rushing out and hiking in August because it might disturb their plans for Glenn Stevens to take over.

You mean politically disturb the situation?

Well it’s the Government’s decision. The head of the Reserve Bank is the Government’s decision and fair enough, too, so they get their chance to make a statement about who they want on the Reserve Bank board, and heading the Reserve Bank. If I were the Reserve Bank and I wanted deputy governor Stevens to take over I wouldn’t be rocking the applecart just ahead of that decision.

What in particular do you look at in our economy to gauge where inflation’s going?

Oh, I think the main game is just assessing the CPI report as it comes out. The Reserve Bank has a range of measures of underlying inflation that it seems to pay a fair bit of attention to so they’ll be the ones that I’ll be looking at most carefully. The economy overall is a tough one to assess in that we’re in the 15th year of good growth and a recession is long overdue; but there’s nothing obvious in the pipeline that says there’s a recession just around the corner. But the economy’s hard to read because there’s quite extraordinary boom in WA and Queensland versus some weaker times in New South Wales and Victoria. I think someone described it as the economy that has its head in the oven and feet in the freezer but on average it’s doing fine and that’s the thing the Reserve Bank responds to '” the average of the economy.

So the Reserve Bank '¦ when it’s looking at a rise really doesn’t care that it could really damage New South Wales and Victoria as long as it calms down Western Australia and Queensland?

I think the Reserve Bank is aware of those issues and that’s one of the reasons it wouldn’t be rushing out to hike but as always the Reserve Bank will respond to the average of the day in the same way as the Fed tries to deal with 50 states '” where you’ve got the sunbelt states of Florida and California, Texas '” big states that often do better than the Midwest states. In Europe you’ve got, you know, Germany’s been lagging and France and Italy haven’t been much better and they’ve got smaller, faster-growing states and so for smaller and faster-growing countries in fact. So it’s always the case that a central bank has one instrument, interest rates, and so it responds to the average of the areas, the average of the regions.

A big question, of course, is whether wages growth is accelerating. Is it too early to say whether the Government’s workplace regulation changes have had any impact?

Well unemployment a touch below 5% for the first time in a generation, so that the labour market is unusually tight. Wages growth has accelerated on a range of measures but it hasn’t accelerated much in the past two or three quarters. There’s been, I guess, a stabilisation of wages growth at an elevated level and the Government’s Work Choice legislation became operative earlier this year. There’s lots of anecdotal information about some firms being tougher in their wage bargaining processes and carving back some of the extras that have added on to wages, so I think there are less workers out there that are confident of getting wage rises today than there maybe would have been six to 12 months ago.

And that’s something the RBA will be looking to check the pulse on?

Well, yeah. They’ll do their best to try and sense the extent to which that is reflected in the macro-economic data. You know, it is true that the plural of anecdote is data but it’s not clear how the extent to which the anecdotes actually add up to a mass of workers who are under pressure on the wage front.

Isn’t the case though that whatever the industrial legislation the areas that are feeling wages pressure will do so?

Yeah. There’s strong parts of the economy and weak parts of the economy and wages pressure will be strongest in the strongest parts of the economy but it’s as with growth '” the Reserve Bank responds to the average of wages pressure so there’s strong sectors '¦ weak sectors. The Reserve Bank looks at the economy-wide data, which gives us a sort of a weighted average of all the developments in the economy. As I said, the latest wages information seems to be that wages growth is elevated but hasn’t been accelerating recently and that’s a bit of a comfort for the Reserve Bank and one of the reasons it will be cautious about hiking rates further in the near term.

Final question just on Australia. It’s not a sure thing that we will get a rate rise. If we do, is it likely to be just a quarter percent for quite some time?

We’ve had six moves in the past four years. It’s certainly a quarter point at a time. One of the reasons the Reserve Bank is so careful with policy is because the last thing it wants is its fingerprints on the next recession. There’s a recession that’s way overdue. Nothing in the pipeline says one’s just around the corner but the Reserve Bank will be very careful about doing anything towards what might be the end of the cycle. Just one very careful step at a time.