Reserve Bank governor Glenn Stevens' testimony on Friday has reinforced our view that the RBA is on hold for now. We are forecasting one rate rise in 2011, during the September quarter.
The opening statement from the governor to the Parliamentary Committee restated well known themes that were outlined in the Statement on Monetary Policy (SMP) released on February 4. The governor last testified on November 26. Between these appearances, the RBA Board met twice and on both occasions left the cash rate unchanged, at 4.75 per cent.
The main take out from the testimony was the governor’s degree of comfort with the current stance of policy for the time being. The final line in the opening statement was: "Having reached that position in a fairly timely fashion, the Board has judged it to be sensible of late to leave the cash rate steady”.
The first question in the Q&A session was on the rate outlook. The governor, as he did on 26 November, suggested that on the current outlook, market pricing for near-term stability in interest rates is reasonable. He added the obvious caveat, circumstances can change. Later, when asked to give a 12 month guarantee on rate stability the governor declined, but said that the RBA is "ahead of the game”.
The governor in his opening statement described how the outlook has shifted since he last testified. The global economy looks a little stronger, global commodity prices have risen further, the terms of trade are higher and look likely to peak higher and later, the consumer has been more cautious, core inflation is lower but headline inflation will be higher because of the floods and Cyclone Yasi. These natural disasters will disrupt activity early in 2011 with a subsequent process of rebuilding.
As highlighted in the SMP, the governor stated that: "In broad terms, therefore, the main medium-term story the Bank has been pointing to for some time still seems to be in place: we are experiencing a terms of trade event of very large size, of the type that happens only once or twice in a century. Our job is to try to manage this so as to avoid, as far as possible, the instability that has accompanied most previous such episodes.”
The RBA has tweaked its headline CPI forecast, lifting the June quarter forecast to "around 3 per cent” from the 2.5 per cent published in SMP because of Yasi. It’s believed that these effects should begin to reverse in the second half of the year and should have largely dissipated by the end of 2011.
As in the SMP, the governor in his opening statement spoke of the cautious consumer and pondered how long such cautious behaviour might continue. The RBA expects the consumer, in time, to become less cautious within the context of a favourable economic environment. The governor noted that, from a macroeconomic point of view, this cautious behaviour is not entirely unwelcome with household balance sheets becoming more resilient.
In the Q&A, on the issue of rebuilding structures damaged by the floods and possible capacity constraint concerns, the RBA made two points: there will be some slowing down of other spending and housing construction in south-east Qld has been softer than other parts of Australia and hence has some spare capacity.
On the labour market, the RBA described it as tight and close to full employment. They noted that outside of mining, there is not the aggressive bidding for labour that was apparent in 2007.
The Q&A touched on a range of other issues which have been discussed thoroughly in the past. The issues were broad ranging in nature, including the suggestion from one committee member, from south-east Qld, of the need for a Qld currency and a Qld central bank.
Andrew Hanlan is a senior economist at Westpac.