The mystery about today’s Reserve Bank decision is just what has frightened the governor. Except for two brief lines recording that the cash rate remains steady, the rest of the official statement makes the case for the rise the markets were expecting.
The only reason given for delaying the next increase was that the RBA wasn’t sure of the impact of banks lifting their rates by about one percentage point more than the official increases.
“Since information about the early impact of those changes is still limited, the Board judged it appropriate to hold a steady setting of monetary policy for the time being,” said governor Glenn Stevens.
And that sounds like utter nonsense, a long way short of the carefully reasoned explanations the RBA has been giving the markets over the past couple of years.
As the deputy governor said in a speech in December, the impact of the banks going further than the cash rate rises is to lift monetary policy to the bottom of the “neutral” zone. No surprise about that.
If the governor meant he doesn’t know yet what impact barely neutral monetary policy has on the economy, he could try reading the rest of his own statement to form the conclusion: not much at all.
On the up and up
According to his good self, the labor market is strong and unemployment has peaked, there’s an upturn in housing construction, public infrastructure is boosting demand, money is cheaper than normal and household net worth is recovering, that is, house and share prices are on the up and up.
Indeed, “credit for housing has been expanding at a solid pace and dwelling prices have risen significantly over the past year,” says Stevens.
There’s a rather bald statement that the RBA thinks inflation will be “consistent with the target” this year, which would mean an underlying inflation rate of between 2 and 3 per cent, but there’s no justification for that hope that inflation is falling. To the contrary, the governor says: “CPI inflation has risen somewhat recently as temporary factors that had been holding it down are now abating.”
Er, yes, governor. That’s what a strong labor market, skills shortages, cheap money and sharply rising house prices will tend to do - take away the fear that prevented businesses and workers increasing prices when everyone was talking about a recession. After the sharp surge in housing prices over 2009, various “experts” are tipping they will “moderate” to about 10 per cent this year. There’s nothing moderate about that at all.
Sovereign worries
It suddenly looks like the RBA no longer wants to be ahead of the game, but is waiting for worse inflationary news to justify its next rate rise. And Stevens does promise further rate rises if the economy continues to grow, as he predicts, to trend strength this year.
The only mentioned threat to that was concern about some sovereign debt increasing, a reference to Greece and Dubai. Which raises the possibility that the RBA might be more worried about several heavily indebted nations than it is prepared to spell out.
When the stated reason doesn’t hold up, one is left to wonder. When the RBA had been so strong in its warnings about house prices taking off and now seems nonchalant about it happening, something seems to be missing.
Or maybe the RBA just likes to prove it is not to be considered too predictable. When everyone ‘s sure rates will rise, it teaches them a lesson by sitting pat for a month.
Nah, that would be too silly a reason, even sillier than “we don’t know what impact putting up interest rates has” while still promising to put up rates.
We can only hope the full minutes of the meeting will make more sense when they’re released in a fortnight.
Michael Pascoe is a BusinessDay contributing editor.
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