Economics
Chief economist update: RBA still in denial

Say what?

"The low level of interest rates is continuing to support the Australian economy. Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual. Taking account of the available information, the board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time."

That's what RBA Governor Philip Lowe said yesterday in his monetary policy statement, explaining the rationale behind the Australian central bank's record 30th month to keep the official cash rate unchanged at a record low 1.5% after the conclusion of its first board meeting for 2019.

While Lowe acknowledged that "the central scenario is for the Australian economy to grow by around 3% this year and by a little less in 2020" - a downgrade from December's expectations of 3.5% in 2019 - and underlying inflation is likely to be "gradual and to take a little longer than earlier expected. The central scenario is for underlying inflation to be 2% this year and 21/4% in 2020" - downgraded from December's "21/4 per cent in 2019", he remains optimistic (as one would expect of any (all) central bankers).

What puzzles me is the phrase, "taking account of available information". This is because "available information" on the Australian economy points to at least a change in stance to neutral, if not an outright reduction in interest rates.

I've already listed them in my piece, "Anatomy of an RBA rate cut" dated 30 January, and with matching pictures.

It appears that the RBA continues to hitch its star on the improving labour market and its impact on wages.

"The outlook for the labor market remains positive. The unemployment rate is 5%, the lowest in six years. With the economy expected to continue to grow above trend, a further reduction in the unemployment rate is likely. The vacancy rate is high and there are reports of skills shortages in some areas. The stronger labour market has led to some pick-up in wages growth, which is a welcome development. The improvement in the economy should see some further lift in wages growth over time, although this is still expected to be a gradual process."

This space has shown that while the headline numbers in the latest domestic labour market stats were so very good, the details hide the devil. See "Good jobs bad jobs" published here on 25 January 2019.

The latest update on the ANZ job ads - a leading indicator of employment growth three months ahead - support my not so positive outlook on the domestic labour market. Job ads dropped by 3.7% in the year to January 2019 - the biggest contraction since February 2014) - nearly reversing the 4.2% gain recorded in the previous month.

But wait there's more! In early June 2018, this put forth a thesis that long stretches of steady interest rates have been followed by a rate reduction ... despite a priori "statements" of optimism from the RBA on each and every occasion.

Here are some snippets of the piece if you're interested:

The second longest stretch of steady interest rates is the 18-month period between August 2013 and January 2015 with the cash rate frozen at 2.5% before being lowered to 2.25% on February 2015.

The RBA don't meet in January but the statement issued by then RBA Governor Glenn Stevens on December 2014 talked about moderate pace in the global economy, accommodative global financial conditions and "In Australia, most data are consistent with moderate growth in the economy ... Inflation is running between 2 and 3%, as expected" ... and "some forward indicators of employment have been firming this year."

Therefore, "In the board's judgement, monetary policy is appropriately configured to foster sustainable growth in demand and inflation outcomes consistent with the target. On present indications, the most prudent course is likely to be a period of stability in interest rates."

And then came the cut at its February 2015 meeting, despite data available to the RBA at the time showed GDP growth averaged 2.6% in 2014, the weighted median inflation measure and wages growth both averaged 2.6%. The unemployment rate though was running at around 6%.

'Twas the same when the RBA held interest rates unchanged at 2% between May 2015 and April 2016 or at 4.75% back in November 2010 to October 2011, both were followed by a reduction in interest rates.

Read more: JobsRBA GovernorANZGDPGlenn StevensPhilip Lowe
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