The Reserve Bank of Australia

Australia: 'The boom isn't over, but the bubble is'

The Reserve Bank board disappointed another troubled Australian industry today - the one devoted to speculation about and betting on the next move in interest rates

The Age

4 September, 2012

No change is no news for media and little change for traders.

What's missed is that the industry is devoted to wanting a move, any move, but the RBA likes nothing more than steady monetary policy.

Given the expected and delivered reasons for today's decision to leave the cash rate unchanged - growth around trend, inflation near the bottom of the desired range, unemployment low - keeping rates unchanged month after month puts the RBA in the central banker's sweet spot.

Business regularly chants that it wants certainty (heavens knows that's a forlorn hope in the reality of forever-changing and evolving markets and conditions), but it doesn't recognise or welcome the certainty it presently has on interest rates.

If you were going to wish for anything, it would be that rates remain unchanged for many, many months to come, given what would be implied by a movement up or down.

The brief statement after the meeting by governor Glenn Stevens leaves the chances of a movement down in the lap of the international economy, while the chances - and perhaps a warning - of a rise remains in the domestic economy's ability to handle a softer dollar.

“The Bank's assessment is that inflation will be consistent with the target over the next one to two years. Maintaining low inflation will, however, require growth in domestic costs to remain contained as the effects of the earlier exchange rate appreciation wane,” said Stevens.

And that's another reason for local businesses to think twice before complaining too much about our strong currency.

Keeping perspective

The statement gave another calm reminder about keeping perspective when considering the current headlines about lower commodity prices:

“Some commodity prices of importance to Australia have fallen sharply in recent weeks. The terms of trade peaked a year ago and have declined significantly since then, though they remain historically high.”

It's been the media's habit recently to show the dramatic graph of iron ore prices since 2009 - the price back to where it was three years ago after its dramatic surge. What's not shown is a graph over, say, the past decade, which makes the recent bubble on top of the boom obvious.

The boom isn't over, but the bubble is, and that's not spooking the RBA.

Similarly, yesterday's over-cooking of a monthly swing in the seasonally-adjusted reporting of retail sales didn't raise eyebrows much in the RBA's eyrie in Martin Place:

“Consumption growth was also quite firm in the first half of the year, though some of that strength was temporary.”

If ever a headline-grabbing retail sales figure was dismissed with a scant mention, that was it. My suspicion is that the RBA pays much more attention to the trend series than the flighty seasonally adjusted number.

The RBA would also be aware that of the six key categories used by the ABS to classify retail sales, the department stores make up the smallest and least important.

The trials and tribulations of poor old Myer and David Jones - those 20th century business models struggling in the second decade of the 21st century - is of little relevance in the complex overall question of consumer behaviour.

China caution

The one noticeable change in the statement to feed the monetary doves is a subtle downgrading of the standard comment about China. Usually, the RBA makes the point that China's reduced rate of growth is a good thing as it is more sustainable. This time there was a slightly more cautious:

“Growth in China remained reasonably robust in the first half of this year, albeit well below the exceptional pace seen in recent years. Some recent indicators have been weaker, which has added to uncertainty about near-term growth. Around Asia generally, growth is being dampened by the more moderate Chinese expansion and the weakness in Europe.”

So, weaker, but put in the context of previous statements, still fine.

The world remains a dangerous place - isn't it always?

But the Australian economy remains fundamentally strong on the key measures and the RBA remains in a watchful sweet spot, very happy to leave rates steady and hoping it that will remain the case.