Tag Archives: glenn stevens

Why what happens in Washington matters in Canberra

Among the economic indicators Treasurer Scott Morrison needs to keep an eye on, the US labour market should be toward to the top of the list.

As the US Federal Reserve begins to gradually edge up its funds rate, Chair Janet Yellen has indicated the tightness of America’s market for workers will be an important factor in shaping the central bank’s thinking on how quickly to proceed with tightening monetary policy.

The state of the US labour market matters because as it gets tighter, so the bargaining power of workers is likely to increase and wages rise, helping force inflation up.

The higher inflation goes, the more the Federal Reserve will feel compelled to raise interest rates.

This matters for Australia because the higher official US interest rates rise, the greater the downward pressure on the Australian dollar (though this relationship should not be overstated).

As the Australian economy tries to establish sources of growth outside the boom-and-bust resources sector, a lower dollar helps by making exports and locally-made goods and services more competitive.

In the past year, the $A-$US exchange rate has slipped down more than 10 cents to 71.2 cents, a far cry from the above-parity levels reached earlier this decade, when massive mining investment was sucking in huge amounts of capital.

Given that the US unemployment rate has already dipped to 5 per cent, it might come as a surprise that the Federal Reserve has only just begun to increase interest rates.

But behind the headline number, data shows that many of the jobs created in the last few years have been casual or part-time. This suggests that there is considerably more slack in the labour market than a 5 per cent unemployment rate would ordinarily imply.

Recent soft income growth underlines the point. In the year to September, US wages grew by 3.66 per cent, virtually half the long-term average of 6.33 per cent.

This is being reflected in consumer spending – US retail sales grew by a modest 1.7 per cent in the year to November.

The Federal Reserve held off embarking on a tightening cycle until it was confident that the US recovery from the global financial crisis was well-established, so its decision earlier this week to raise interest rates, even by a meagre amount, is seen as a vote of confidence in the world’s largest economy.

As he contemplates the sea of red in the Commonwealth’s financial accounts, Scott Morrison can only hope that this is the case.

Despite his bizarre denialism on the matter, the Federal Government does indeed have a revenue problem. Collapsing commodity prices and soft income and corporate tax collections account for a lot of the deterioration in the Budget position.

And the government’s own forecasts suggest there is not going to be a quick turnaround. Earlier predictions that the economy would expand by 2.75 per cent this year have now been pared back to 2.5 per cent, and next year it is expected to grow by 2.75 per cent rather than 3.25 per cent.

Estimates of business investment, household spending, the terms of trade and private final demand have all been downgraded.

As Reserve Bank of Australia Governor Glenn Stevens observed last month, a rebalancing in the sources of growth is underway, but it is a little rockier than might have been hoped for.

With the economy poised between the drag caused by tumbling resources investment and support coming from a nascent recovery in non-mining activity – particularly services – now would seem a bad time to be adding to the weight on activity by cutting into government spending.

To his credit, Morrison has so far eschewed the sort of bloodletting Joe Hockey pursued in his first Budget.

But the cuts he has outlined – crackdowns on welfare ‘rorts’ and the axing and reduction of bulk billing incentives for pathology and diagnostic imaging services, in particular – make little economic sense.

Both sets of measures, collectively worth more than $2 billion, will mean consumers have less money to spend.

As the country’s experience through the GFC has shown, this is significant. Arguably the most effective measure taken by the Federal Government when the GFC hit in late 2008 was to deposit money directly into the bank accounts of millions.

While much of this money was saved, enough was spent to keep shop tills ticking over, shielding thousands of retail and services sector jobs.

This was especially the case among lower-income households, where a higher proportion of income has to be spent rather than saved.

The bulk of Morrison’s cuts will fall on just such households.

At a time when retailers and service providers are trying to find their feet after several years of lacklustre conditions, this is hardly helpful.

Such unhelpful tinkering by governments all too common.

Economists often lament that government interference prevents an economy’s ‘automatic stabilisers’ (floating currency, swings in tax collections and welfare payments) from working effectively, making a difficult situation far worse.

But it is totally unrealistic to expect governments in such situations to do nothing – after all, they have usually been elected on a platform to ‘do something’.

As Ross Gittens suggests, they could do much worse than to devote their energies into devising a path to surplus that kicks in once a recovery is established, and to work out how to better handle future prosperity.

 

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Highest unemployment rate in 11 years doesn’t equal interest rate cut

A lift in the unemployment rate to 6 per cent – its highest point in almost 11 years – will surprise no-one.
In fact, the real surprise has probably been that it has taken this long.
In keeping with the trend of previous jobs reports, the Australian Bureau of Statistics has revealed that a further decline in full-time employment occurred in January, this time by 7100 positions, taking the number of Australians employed full-time to 7.95 million – the lowest number in almost two years.
The reason the unemployment rate has jumped to 6 per cent after spending the latter half of 2013 stubbornly stuck around 5.7 and 5.8 per cent is because, perversely, because the number of discouraged job seekers has stabilised.
The participation rate, the proportion of the working age population in the labour force (ie with a job or actively seeking employment), held steady last month at 64.5 per cent.
Amid all the high-profile announcements about factory closures (most notably and immediately, the SPC cannery in Shepparton), few people will be shocked by confirmation that the unemployment rate has increased.
The number of Australians who want to work but haven’t got a job now stands at 728,600 – a jump of almost 17,000 from last December.
But does this mean the Reserve Bank of Australia will put a rate cut back on its agenda?
That appears unlikely.
The central bank had anticipated that the unemployment rate would at some point reach above 6 per cent, so the fact that it has now done so will not be “new news”.
Additionally, inflation has turned out to be stronger than the RBA had anticipated, making it wary about adding further stimulus to the economy.
As noted in a previous post, RBA Governor Glenn Stevens was unusually explicit following the central bank’s February 4 Board meeting about the future course of interest rates.
Usually, like many central banks, the RBA shies away from being too definitive about the future of monetary policy, which is not unreasonable given the fluidity of global economic and financial conditions.
So when Mr Stevens said the most prudent course for the RBA was “a period of stability in interest rates”, it was a clear message to markets not to expect rate cuts – or hikes – any time soon.
An unemployment rate with a ‘6’ in front of it would not appear to change that message.

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RBA locks in 2.5 per cent cash rate – for now

Don’t expect interest rates to go up any time soon but, equally, don’t expect them to go down – that was the clear message from the Reserve Bank today.
In unusually direct language, RBA Governor Glenn Stevens has moved to lay to rest interest rate speculation for the next few months, saying the most prudent course for the central bank to take was likely to be “a period of stability in interest rates”.
That is central bank speak for everyone – those predicting imminent rate rises, and those calling for rate cuts – to take a Bex and calm down.
As mortgage holders ponder the pros and cons of fixing part of their loan, and investors do their credit sums, the Reserve Bank has tried to give some reassurance by flagging official rates are not likely to move for some time yet.
As widely tipped, the RBA has decided to hold the official cash rate at 2.5 per cent this month.
What many may not have anticipated though, was the central bank’s unusual willingness to flag its interest rate intentions.
Following the Reserve Bank Board’s first meeting for 2014, Mr Stevens released a statement that showed the RBA is in no rush to change its policy settings.
“On present indications, the most prudent course is likely to be a period of stability in interest rates,” he said.
The Reserve Bank sees no compelling reasons yet for either a rate increase, or a rate cut.
Unexpectedly strong inflation growth in the December quarter (underlying inflation grew by 0.9 per cent to be up 2.6 per cent from a year earlier), along with the falling exchange rate and increased housing activity, had prompted some to speculate that the RBA would soon have to consider raising the c ash rate.
But while Governor Stevens admitted monetary policy was “accommodative”, interest rates were “very low”, and house prices have surged, there was as no yet sign of a dangerous build up in indebtedness. In fact, household credit growth is moderate.
On inflation, the central bank so far does not seem to be phased by the jump in prices in December, some of which it attributed to importers and retailers quickly passing through to consumers much of the increase in costs caused by the easing exchange rate.
Mr Stevens said that although inflation was stronger than the central bank had predicted when it released its most recent Statement on Monetary Policy late last year, it was “still consistent with the 2 to 3 per cent target over the next two years”.
Those arguing the case for a rate cut have pointed to the nation’s anaemic growth rate (2.3 per cent in the 12 months to the September quarter 2013), a plunge in mining investment and weak labour market (the economy shed almost 32,000 full-time jobs in December and the unemployment rate is expected to rise above its current 5.8 per cent) to show the need for more support for activity.
But to this line of argument, Mr Stevens said monetary policy was “appropriately configured” to foster growth in demand (ie don’t expect them to go any lower).
Of course, the RBA might be considering the possibility (raised by Deloitte Access Economics director Chris Richardson) that commercial banks will lower their lending rates as they secure cheaper sources of funding on international markets. The Governor’s statement gives no hint on this front, except to say that long-term interest rates and risk spreads remain low, and there is adequate funding available through credit and equity markets.
As the economy gropes toward sources of growth to replace the sugar hit from resources investment, conditions are likely to stay rocky and uncertain.
In this shifting economic environment the RBA has moved to provide consumers and investors with one welcome point of consistency, at least for the next few months.

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Is there a case for a February interest rate hike?

The rate hike hares are running following evidence that shoppers are spending more freely and building approvals are back to levels last seen almost three years ago.

In a sign that the stimulus from low interest rates is sustaining an improvement in consumer outlook despite the soft employment market and federal budget gloom, retail sales rose 0.7 per cent in November to be up 4.6 per cent from a year earlier, while building approvals remained at their healthiest level in years, despite a small retreat from the previous two months.

The solid readings have led at least one prominent economist to predict the Reserve Bank of Australia will soon have to begin raising interest rates in order to ward off the risk of a surge in inflation.

Market Economics managing director Stephen Koukoulas said today the economy “is on fire”, and that the Reserve Bank Board should lift its cash rate when it returns for its first monetary policy meeting of the year on February 4.

The latest readings on the economy follow the release of figures last week showing the nation’s trade deficit narrowed significantly in the second half of 2013, a trend that is expected to continue as the completion of major resource infrastructure projects boosts the nation’s export capacity.

After reaching above $1.5 billion in mid-2013, the deficit had shrunk to little more than $110 million in November, and anecdotal evidence indicates there was strong growth in iron ore export volumes last month.

Adding to the picture, a Dun & Bradstreet survey released earlier this week indicated that business is becoming increasingly upbeat about its investment and employment intentions.

But worries about the health of the jobs market remain.

According to the Australian Bureau of Statistics, monthly job vacancies have been in a sustained decline since reaching a peak of almost 190,000 in early 2011. In November last year, the ABS reported, there were barely 140,000.

In its mid-year update on the economy, Treasury was downbeat on the labour market, predicting the jobless rate would rise to 6.25 per cent next financial year as the economy grew at below-trend rate.

But, as Kouloulas points out, the jobs market is a lagging indicator of economic activity, and the latest economic data suggest Treasury may have been too pessimistic.

For instance, between August and December it cut forecast dwelling investment growth from 5 to 3 per cent, though as it itself admitted, “finance commitments for new dwellings are now 12.4 per cent higher than a year ago and building approvals have improved noticeably from their trough in early 2012. Higher house prices could initiate a stronger investment response”.

The risk for the RBA is that, if it misreads the situation, a rate hike in the next month or so might puncture nascent optimism and slow or stall (at least temporarily) the recovery in non-mining sectors of the economy.

The risk is heightened by the Federal Government’s tub-thumping on the state of the Commonwealth Budget and looming threat of significant cuts in public sector spending.

In addition, raising rates could help reinflate the Australian dollar, something the RBA would be keen to avoid (one of this blog’s correspondents, @MrMacroMan, said that an RBA official speaking in New York overnight was “very clear on AUD risk and rates on hold”).

Yet, if analysts like Koukoulas are correct and the economy is taking off, an official interest rate of 2.5 per cent would obviously be inappropriate, and could sow the seeds of dangerous price pressures down the track.

As RBA Governor Glenn Stevens might say, the decision may come down to which is the path of last regret.

Fortunately for it, more evidence about the strength of activity is due to be released before the 4 February meeting, including finance and employment figures, as well as construction activity numbers.

In the meantime, markets are likely to be busily recalculating the odds of a rate move at next month’s meeting.

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No more rate cuts, but no rush to tighten yet

Interest rates look set to head higher, but the RBA’s “considerable uncertainty” about the pace of recovery in much of the economy means the first rate hike of the cycle could be delayed until well into 2014.

In a widely-anticipated decision, the RBA Board has decided to hold the cash rate at 2.5 per cent – meaning it will have been at this historically low level for six months by the time of the Board’s next meeting on February 4.

There is clear evidence that low interest rates are having an effect.

The property market is strengthening (house prices have risen, building approvals are up 23 per cent from a year ago), company profits are growing (up almost 9 per cent in 12 months), shares are rising (up 20 per cent in the year to date), and retail sales are increasing at a sustained solid clip (three consecutive monthly increases of 0.5 per cent or greater).

And the central bank thinks there is more of such news to come.

As RBA Governor Glenn Stevens put it today, “The full effects of these decisions [to ease monetary policy] are still coming through, and will be for a while yet”.

This is coupled with tentative signs that activity in the non-mining parts of the economy is picking up.

Official capital expenditure data showed manufacturers and other businesses were gradually increasing their investment, and the latest report from credit reporting firm Dun & Bradstreet showed 10 per cent of firms intend to hire extra staff in the first quarter of 2014.

If this is accurate, and businesses act on their hiring intentions, the unemployment rate may not rise much higher.

In further promising news, the official GDP numbers for the September quarter, due out tomorrow, may also be a bit stronger than many have been predicting.

The Australian Bureau of Statistics threw in a surprise today with its report that the trade surplus surged more than 50 per cent in three months to almost $9 billion, adding around 0.7 of a percentage point to activity in the September quarter.

The RBA’s known unknowns: the dollar and non-mining activity

But the persistently strong dollar and the sputtering recovery in economic activity outside the mining sector are the two greatest areas of uncertainty for the Reserve Bank.

Continuing recent efforts to talk the currency down, Stevens said the dollar (which was trading at just below US91 cents following the RBA announcement) was “still uncomfortably high”.

He almost didn’t need to add that the high exchange rate will have to come down in order for the economy to achieve “balanced” growth.

On this front, the Governor admitted that expectations for an acceleration in activity outside the mining sector were subject to “considerable uncertainty”.

Market Economics managing director Stephen Koukoulas is one of the few who for some time now have been predicting rates to rise in 2014 – he tips in the first three months of next year.

But the strong dollar could make it hesitate.

Koukoulas, for one, thinks there is much more the RBA needs to do much more to get the currency down – jawboning alone has had little effect.

If he is right, look for big sell-offs of the currency in coming days.

 

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A good week for the RBA

Every now and then you have a week when things seem to go right – your baby son suddenly begins sleeping soundly and copiously, you get the perfect park at work – twice! – and your bank gets in touch to say it has made a $100 mistake in your favour, and lets you keep it (ok, so that last one never happens, it is just a dream).

The Reserve Bank of Australia has just had such a week.

When the RBA Board sits down tomorrow for its monthly monetary policy meeting, it will see little reason to move the official cash rate.

All the signs are that the economy is behaving in ways that it has anticipated, and that are broadly in keeping with its monetary policy stance.

Low interest rates appear to be working to encourage activity in non-mining parts of the economy, particularly housing, while the dollar is depreciating and worrying price pressures are yet to appear.

Though there was a slip in building approvals last month (down 1.8 per cent), much of this was due to the volatile apartments segment of the market, and annual growth remains a healthy 23.1 per cent.

Of course, holding interest rates at historically low levels for an extended period carries with it risk, and some have started to fret that a bubble in the housing market, particularly in Sydney, is developing.

But the overblown talk of an over-heating property market, never well-founded, looks increasingly silly. Sure, house prices have surged in the major cities – most notably Sydney and Melbourne – but there are at least three good reasons to dismiss talk of a bubble at this stage. Firstly, there are signs that the market in established housing is losing some of its heat and price growth is easing. Secondly, and perhaps most importantly, credit growth remains modest – borrowing for housing grew by 0.5 per cent in each of September and October to be up 5 per cent from a year earlier, which is hardly what could be described as “bubble-like”. Thirdly, the nation’s population is growing at a solid rate of around 1.8 per cent, and the easing dollar makes Australian property an increasingly attractive proposition for foreign investors.

There are also encouraging signs that manufacturers and other businesses are starting to pick up the pace of their investment – a development that is coming none too soon, given the rapid deceleration in mining investment.

Official figures show that in the September quarter, mining companies cut their spending on plant and equipment by 7.1 per cent (while expenditure on buildings and structures increased 5.6 per cent). In the same period, manufacturers spent an extra 3 per cent on plant and equipment, and increased funds for buildings by 1.5 per cent.

Any investment plans should be well supported by healthy balance sheets. The Australian Bureau of Statistics confirmed today that business profits grew almost 4 per cent in the September quarter and are up almost 9 per cent in the past year. In the same period, wages have grown 3.1 per cent.

While GDP figures out on Wednesday are likely to show the economy was just ticking over in the September quarter, evidence that non-mining activity is building should push consideration of more rate cuts further into the background.

Instead, the RBA Board may soon begin to consider the timing of a rate hike.

Though it is unlikely to make such a move tomorrow, the central bank will be heartened by the dollar’s slide in recent days. Governor Glenn Stevens made it clear again last week that he thought its sustained strength against the greenback has been increasingly difficult to justify.

Inflation and wages appear well contained for now, but the longer the cash rate is kept at 2.5 per cent, the greater the risk prices could accelerate, which would in turn increase pressure for wage hikes.

As ever for a central bank, the trick is in the timing. Push up rates too soon or too fast, and the dollar could rebound, but leave them low for too long and potentially destabilising price pressures could accumulate.

 

 

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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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