The Distillery: RBA jawboning

For business commentators the first Tuesday of November means one thing: a rates decision from the Reserve Bank of Australia. Sure, the commentariat pays attention to the race that stops the nation but only so they can work a few carefully worded puns into their prose.

As mentioned yesterday morning a hold on rates was considered the best bet on Cup day and so it proved, with little inkling the RBA gave any other option serious consideration. The news had scribes going in several directions, with one addressing the central bank’s sudden deeper interest in fiscal policy, while others came to the conclusion the RBA’s hands are tied thanks to dollar moves largely out of their control.

Elsewhere, one jotter provides some guidance for the keenly awaited review of the financial system, while another delves into a few intriguing share trades at David Jones.

First to rates, The Australian’s Richard Gluyas tackles the issue of the strong dollar and why the RBA has limited options for deflating our currency. But that won’t stop RBA Governor Glenn Stevens from trying.

“While a lower exchange rate is desperately needed to facilitate an economic rebalancing as the resources boom fades, the central bank is fearful of inflating a housing bubble if it exerts direct downward pressure on the dollar by easing the cash rate. So what to do? Well, not much, apart from backing up last week's jawboning exercise.”

The Australian Financial Review’s David Bassanese also pens the notion of ‘jawboning’, agreeing that the rate reduction option for devaluing the dollar is largely closed for the RBA.

“What is a surprise is the RBA’s ratcheting up of its ‘jawboning’ against strength in the Australian dollar… This suggests the RBA feels the economy will need a more expansionary level of monetary conditions, but would prefer it came through weakness in the high exchange rate, rather than further cuts in the already quite low official cash rate.”

The notion of tied hands and jawboning gets a real workout, emanating through much of the commentary on the rates decision. The Herald Sun’s Terry McCrann continues the trend, though he mercifully offers a firm prediction: rates aren’t going anywhere anytime soon.

“It's steady as she goes into a broadly not-too hot, not-too cold economy - albeit one that falls short of the real "Goldilocks" good times that we saw before the global financial crisis. Then, once we really get into 2014, we are mostly in the hands of the next Fed head, Janet Yellen, and the local property market.”

Beyond the Fed, McCrann suggests we keep an eye on bank lending statistics and the household savings ratio as a pointer to the next rates move.

Business Spectator’s Stephen Bartholomeusz is also in the oversized camp insisting rates are going nowhere. While discussing the immediate positive impact of the RBA’s dollar rhetoric, Bartholomeusz discusses what it would take for the dollar to fall dramatically. Once again, all eyes are on the Fed.

“It needs the Fed to do (the) job for it, but the Fed – despite increasing concerns in the US about the corrupted and potentially dangerous incentives US monetary policy has created for investors – appears to be reluctant to push the button on a taper while the country’s economic growth remain sluggish and its fiscal settings, thanks to the peculiarities of the US political system, relatively contractionary.”

All the dollar chatter in the rates statement did lead the Aussie to slump around half a cent in the immediate aftermath. It’s since recovered much of that fall, however, and sits above where it was Monday.

The markets really can be a cruel tease on occasions.

Meanwhile, Fairfax’s Michael Pascoe suggests the US isn’t the only home of soft public expenditure, with contractionary Australian fiscal policy drawing the attention of the RBA’s Stevens. With nothing in these statements said by accident, Pascoe sees the mention of fiscal policy as significant.

“With a central banker’s careful phrasing, governor Glenn Stevens used one of the precious sentences in today’s brief post-board statement to point out that public spending is forecast to be “quite weak”. Along with observing that global financial markets are less volatile than a month ago, the comment on fiscal policy is about the only difference between today’s statement and that of the last meeting.”

Still, we won’t know too much about the perspective on fiscal policy until the release of the board meeting minutes and the bank’s quarterly statement on monetary policy, which is due out on Friday. 

It’s definitely something to keep an eye on moving forward.

The RBA would be happy for the government to assist with some of the heavy lifting in boosting growth given its main tool – rates – is already resting at a record low and tempting the creation of a new housing bubble. Add in a bit of foreign exchange help from the Fed, through the long awaited taper, and perhaps the RBA could be in a position to raise rates at some point next year.

A lot will have to go right for that situation to eventuate, however, not least of which is a requirement for the markets to withstand the impact of the first taper. Nothing we’ve seen so far suggests that is a smart bet.

In company news, the Herald Sun’s McCrann labels the timing of the Nine Entertainment float near perfect for its owners, while Fairfax’s Elizabeth Knight investigates the share purchases of two David Jones directors two days before the release of sales results that outstripped market expectations. Knight is careful not to suggest any impropriety, but it is a story we can expect to hear more about in coming days.

Meanwhile, Knight’s colleague Malcolm Maiden has some friendly advice for the government when selecting the people charged with providing recommendations for changes to our financial system. Think outside the box, he says, and inject some youth into the panel of advisors.

Finally, the AFR’s Matthew Stevens speaks of the tensions between rail operator Aurizon and its Queensland customers, while his colleague Tony Boyd praises the plans to sell the Port of Newcastle and sees it as another step toward more privatisations nationwide.