Reserve Bank governor Glenn Stevens again sent markets twitching yesterday with comments on interest rates and the dollar that probably left everybody just as confused as they were before his lunchtime speech about what might happen at next Tuesday’s meeting of the Reserve Bank board.
That’s everyone bar the prediction markets which now reckon there’s an 87% chance of a rate cut next Tuesday – even though what he said yesterday was a restatement of what he said nearly a month ago after the July board meeting, and what was in the minutes of that meeting.
The dollar fell 1.25 US cents at one stage (helped lower by weaker than expected building approvals for June) and ended trading in Australia around 90.60.
The stock market, which had been falling before the release of the building data at 11.30 am and the 1 pm speech by Mr Stevens, started rising and ended the day up around one point, compared to being down more than 25 at one stage.
But it remains wary, as do other markets, about the post Fed meeting statement early tomorrow morning and what it might contain about the future of the current round of quantitative easing.
In his speech, Mr Stevens reiterated that inflation would be no bar to a cut in interest rates if needed to support the economy, which is what the post meeting statements in the past couple of months and the minutes have been saying as well.
He also "We have been saying recently that the inflation outlook may afford some scope to ease policy further if needed to support demand," Mr Stevens told a Sydney lunch.
"The recent inflation data do not appear to have shifted that assessment," he added. Analysts grabbed that comment and wound up the odds of a rate cut next Tuesday.
The June quarter consumer price index data out a week ago, showed underlying inflation ran around 2.4% in the second quarter, well within the RBA’s long-term target band of 2% to 3%.
And, Mr Stevens welcomed the recent decline in the local dollar, down 13% from its most recent highs against the greenback.
"The recent decline in the exchange rate seems to make sense from a macroeconomic perspective," he said. "It would not be a major surprise if a further decline occurred over time."
So the currency obliged and dipped again.
Mr Stevens also pointed out that low rates were intended to nudge investors toward taking slightly more risk.
"There are clearly signs of policy working in this respect, though not, to date, by so much that we see a serious impediment to further easing, were that to be appropriate from an overall macroeconomic point of view," he said.
In other words he doesn’t see any booms or bubbles occurring in the economy that might need a rate rises to bring under control (So much for all that alarmist nonsense about property and housing prices showing signs of a boom).
The tone of his speech, entitled "Economic Policy after the Booms", (http://www.rba.gov.au/speeches/2013/sp-gov-300713.html) looked at the challenges ahead as a long boom in mining investment comes to an end.
Consumption had been subdued as households chose to boost their savings in the wake of the global financial crisis and finding new drivers of growth is crucial as mining investment had peaked after rising strongly for some years.
That is a point Mr Stevens and other senior executives in the bank have been making for the past 18 months.
Housing and non-mining investment will be the areas, but the transition will be slow, even if the dollar’s recent fall, has helped.
