Is Aussie confidence set to bounce back?
It never ceases to amaze me that as we discuss the end of the mining boom (well, as policy makers and others do, with a straight face), iron ore prices have shot back up to nearly $130 and Rio Tinto reports solid production numbers.
There has long been a tendency towards alarmism and fear in this country. Many commentators and leaders get spooked very easily and I think this is a remnant of the global financial crisis. The nation’s real economy may not have been ravaged by the global downturn, but our national psyche certainly has. I’m left wondering then, having read yesterday’s Reserve Bank minutes, whether that could be about to change.
At face value, reading the minutes does leave an impression that the board is less inclined to cut at the moment, following the recent depreciation of the Australian dollar. That would be consistent with the rest of their commentary, which hasn’t really changed for a long time.
So the board expects domestic economic growth to be a little below trend and global growth to be around trend. With inflation currently at the mid-band and expected to rise, the traditional approach to monetary policy would imply the Reserve Bank would not be cutting at all. More to the point, the board notes that there are some signs that rate cuts are finally starting to gain traction, notwithstanding the volatility of some of the monthly indicators.
Don’t forget though that through much of the RBA’s easing program the unemployment rate was falling, jobs growth was rising and economic growth more broadly was accelerating. Consequently, It’s not well known that growth last year was the strongest in about five years.
How could it be known with the Reserve Bank slashing rates? Instead the board has given great prominence to the dollar which, as we know, is the new unofficial target. We also know that the board thinks the Aussie dollar is still too high.
Noting this, I still think we are more likely than not to get further rate cuts, and the board made it very clear that a rise in inflation would be no barrier to this. They wouldn’t have said this if rates were definitely on hold from here – but instead, they made point of it.
So why the more relaxed attitude? Well, it’s obviously got nothing to do with the economic dataflow, or even upcoming inflation. In fact, there was no hint that the board was waiting for the upcoming inflation numbers before deciding to cut – just the point that if it rose from its current mid-point of the band then they could still cut. That’s an incredible thing for an inflation-targeting central bank to say: effectively, that if inflation moves to the top of the band we will still cut.
With that in mind I don’t think rate cuts are off the table at all, but I do think that the board is concerned about the speed at which the Australian dollar is falling. It’s not as orderly as they would have liked.
It may not be the end of the easing cycle then, but rates could be on hold for some months. This is still actually very positive news for the country as it might finally allow for a much needed lift in confidence over those months.
As we know, confidence has been hit hard by the Reserve Bank’s easing cycle. We’ve seen very clearly in the data that rate cuts (from an existing low level) have panicked people who were otherwise seeing solid economic growth, a low unemployment rate and rapidly improving global economic backdrop.
The easing cycle and associated commentary from policy makers, economists and commentators has kept alive this sense of anxiety. That none of these fears ever materialised is irrelevant. The commentary just moved on to the next worry – Grexit, US double-dip, non-mining recession, mining recession etc.
If rates are indeed on hold for some months, the country just might get some respite from this relentless and false negativity. This would obviously be great for the country and might be just help give a much needed boost to confidence.