Monthly Archives: June 2013

(Tell me why) I hate Tuesdays

The Reserve Bank of Australia rightly takes a considered approach to economic data.

While markets and the media are sent into a frenzy over small shifts in the dollar or the unemployment rate, RBA officials usually emphasise the importance of interrogating the figures and using an accumulation of information – rather than a single data point – to help assess what exactly is going on in the economy.

Such an approach is understandable – indeed, necessary – when each decision made will directly affect the economic fortunes of more than 23 million people, as well as having significance for the international economy.

Which begs the question – why does the RBA Board meet on the first Tuesday of every month (except January), rather than the Wednesday or – as Outlier suggests – the Thursday.

Many of the major data releases from the Australian Bureau of Statistics, including the national accounts, the consumer price index and the monthly labour market reading, are scheduled for Wednesdays and Thursdays, meaning that often the RBA Board meets without access to the latest ABS figures.

This week was a case in point.

The day after the RBA Board decided to leave interest rates on hold, the national accounts for the March quarter were released, showing gross domestic product increased by just 0.6 per cent in the March quarter, holding the annual growth rate down at 2.5 per cent for the third consecutive quarter.

The result was consistent with the observation made by RBA Governor Glenn Stevens after the Board meeting that growth in the past year had been “a bit below trend” (which is generally considered to be around 3.25 to 3.5 per cent).

But the soft growth number hasn’t helped convince people that the Reserve Bank is right when it says recent rate cuts will help push growth toward 3 per cent next year.

Instead, the growing expectation is that the central bank will have to cut the cash rate further.

All of which makes the RBA Board appear – rightly or wrongly – out of step with developments in the economy.

And, when it comes to monetary policy, appearances matter.

The demeanor of a central bank and what is says can be as influential as what it actually does with the cash rate. Just ask Ben Bernanke, Mario Draghi or Mervyn King.

So, even if having the March quarter national accounts figures at its fingertips would not have changed the decision of the RBA Board on Tuesday, the perception that it made its call without taking into account the most recent national growth data is not helpful for its cause.

If the regular Board meeting was shifted to a Thursday instead of Tuesday, it would mean that it would have access to the most recent data possible when coming to its monthly policy decisions.

And, every three months, it would have access to the latest official growth and inflation figures for its cash rate deliberations.

For the sake of perceptions, this would be reassuring for everyone.

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Foreign investment set to be early test of an Abbott Government

Two contradictory faces of the Coalition  when it comes to economic issues were on display this morning.

While on a visit to China, WA Premier Colin Barnett called for an end to “discrimination” in Australia’s treatment of investment by Chinese state owned enterprises (SOE).

Simultaneously, the Nationals are pushing for Government to block a $3.4 billion bid for GrainCorp – which handles most grain grown on the eastern seaboard – by US grains giant Archer Daniels Midland. According to the Nationals, the acquisition would not be in the national interest because of the market power ADM would be able to exert. As part of their attack, the Nationals took aim at the Foreign Investment Review Board, accusing it of rubber stamping foreign investment and not protecting “the national interest”.

So, the conservative government in WA says Australia should be more welcoming of foreign investment, while the Nationals at the federal level want tighter controls.

Let’s take these one by one.

First, Colin Barnett’s concern.

The WA Premier is correct that  state owned enterprises seeking to invest in Australia face different rules to other investors. Specifically,  any proposed acquisition by an SOE of an interest in a mining business – regardless of size or country of origin – must be scrutinised by FIRB. This is different to the rules for other categories of investors, who only face FIRB scrutiny if they seek to acquire a stake greater than 15 per cent in a mining business (a threshold currently around $244 million).

But the reason for differential treatment is obvious: a SOE is not your standard investor. Thanks to their state backing, they are not on the same playing field as purely commercial operators, and can have agendas that are not purely commercial, either. So the idea that they face a different form of scrutiny to other investors appears justifiable.

What about the GrainCorp takeover bid?

Interviewed about it by Fran Kelly on ABC’s Radio National this morning, National Senator Fiona Nash said the Nats didn’t trust the ACCC to protect the interests of farmers if, for example, ADM used its virtual monopoly position to exclude some farmers from its network and/or set rapacious fees.  But, if that is the case, aren’t farmers already vulnerable to such abuses from GrainCorp, given its dominance of the eastern seaboard grain handling network? And what is the evidence that the ACCC would be unable to act to ensure a strong market position was not being abused.

Senator Nash, like Nationals leader Warren Truss, has  also attacked FIRB, accusing it of practically rubber stamping foreign acquisitions in the agriculture sector. She said FIRB should include someone with agricultural industry expertise.

The presumption is that someone from an agricultural background would be more likely to reject at least some foreign investment proposals, the implication being that they would have a better understanding of what constitutes the ‘national interest’ than those currently serving on the FIRB.

Following Senator Nash’s logic further, it would mean that each foreign investment proposal should be scrutinised by a group that includes a member with expertise in whatever particular industry is involved. So who would these experts be? How would they be selected? What specifically would they add to the appraisal process? It would seem to be a pretty slippery path the Nationals want the country to go down.

The concerning thing is that, from 14 September, they will have much more clout to try and get their way. Senator Nash has already flagged that they would ask Joe Hockey, if he became Treasurer, to block the ADM bid. This would put him in a very tricky position. On the one hand, he would be under pressure to satisfy the wishes of a key political ally. On the other, what sort of signal would it send to foreign investors about how welcoming the new government was to offshore capital?

Which way he jumps will be an important early test of his judgement, and of the economic and political abilities of an Abbott Government.

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RBA flags room for more rate cuts

Reserve Bank of Australia Governor Glenn Stevens has indicated that moderate inflation and below-average growth has given the central bank room to edge interest rates down to fresh record lows if necessary.

Though the RBA appears in no rush to ease monetary policy, leaving the cash rate at a record-low of 2.75 per cent for a second consecutive month at today’s Board meeting, remarks by Mr Stevens that “the inflation outlook…may provide some scope for further easing, should that be required”, is likely to stoke speculation that the central bank will lower interest rates further.

The RBA Board is comfortable that, despite the gradual rise in unemployment in the past 12 months and a recent decline in commodity prices, the current record-low cash rate of 2.75 per cent is sufficient to support activity.

Mr Stevens said recent economic data was consistent with the central bank’s assessment that the economy was currently growing at “a bit below” average pace, and would continue to do so “in the near term”.

But the recent plunge in the dollar, which has lost 7 per cent of its value against the US currency in the past month, has helped reduce the pressure for another rate cut, at least for the moment.

Mr Stevens hinted that the central bank is looking for the currency to lose even more ground, reiterating the RBA’s judgement that it is high considering the slide in export prices that has occurred in the past 18 months.

In coming to its decision, the Board has made judgements about how economic conditions both at home and abroad are likely to unfold in the next year or so.

Internationally, it expects global growth to accelerate next year, supported by “very accommodative” monetary policy offshore (which in turn has fuelled the provision of cheap credit). Similarly, it expects low interest rates here to continue to support and strengthen activity in Australia. Mr Stevens said there were tentative signs of this effect in a lift in household borrowing.

The upshot is that the RBA sees no need to hurry in either tightening or easing monetary policy for the time being, it’s assessment being that “the easier financial conditions now in place will contribute to a strengthening of growth over time”.

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Don’t expect interest rate relief

Home buyers should not expect a cut in official interest rates when the Reserve Bank of Australia announces the result of its latest board meeting this afternoon.
The consensus of opinion among the nine leading economists who comprise the Shadow Board is that the slide in the Australian dollar – which has slumped 7 per cent against the US dollar in the past month – means the RBA has some time to consider its next move.
The drop in the dollar has two effects of significance for monetary policy – it takes some of the pressure off export industries that have been struggling to compete overseas because of the high exchange rate, and it also means that some of the deflationary effect of the strong currency has been lost.
For the RBA this means that, on the one hand, it has less work to do to support struggling sectors of the economy, and on the other, it will need to be more alert to a build-up of inflationary pressures which have to this point been well under control.
The upshot, according to the Shadow Board, is that the RBA Board should leave the official cash rate at its historically low point of 2.75 per cent for the time being.
But opinions diverge about what the RBA will need to do in the next 12 months.
Some on the Shadow Board suspect that this may be the low point of the current rate cutting cycle, and expect that the central bank will need to begin tightening monetary policy in coming months as the economy regains some strength and inflation begins to pick up.
Others, however, expect the period of weakness to continue, not helped by soft international conditions.
Overall, the Shadow Board puts the probability that interest rates will need to increase in the next year at 40 per cent, slightly greater than the likelihood of a rate cut.
The Shadow Board is a project by the Centre for Applied Macroeconomic Analysis, based at the Australian National University.

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