Credibility in reserve

The cheer squad a-wishin’ and a-hopin’ for another Reserve Bank interest rate cut is nothing if not persistent, even if they’re reduced to advising the RBA to pretend to want to trim rates again. Too bad the squad is ignoring pretty much all the available evidence pointing to the central bank leaving monetary policy right where it is.

Even the cheer squad doesn’t expect the RBA board to move rates at its meeting on Tuesday, which is why the doves are just pleading for the bank to reinstate an explicit easing bias instead. There would be a little problem with that though: it would destroy the RBA’s credibility.

It’s a simple matter to read the minutes of the September meeting and then ask: what has changed since September 3 and has that change made looser monetary policy more or less likely?

When the minutes of Tuesday’s meeting are released, they’re likely to record that the economies of our key trading partners have mostly continued to improve. Especially, all the scaremongering about a hard landing in China has receded as a wonderful growth rate of about 7.5 per cent is confirmed.

The ripple of headlines about capital flight from some emerging markets has faded, helped somewhat by the US Federal

Reserve’s dithering over tapering. Europe’s mess is no worse and is in some ways a little better, Italian politics notwithstanding.

The threat of financial market instability induced by a possible shutdown of the US government is there, but that doesn’t scare us as much as it used to. Having been to the brink before, the view over the edge isn’t quite as scary. Besides, the threat is not without some benefit to us while it’s credited with weakening the Aussie a touch.

So the international picture does not provide an argument for an easing bias, let alone an actual cut.

Domestically, the news also has been mostly positive while the negative bits were already factored in. The big transitional bet on domestic housing continues to head in the right direction as lower interest rates do their stuff – firming prices and thus encouraging more building, albeit not enough.

And, as the RBA continues to remind us, it’s still early days for the full impact of the past couple of cuts to work their way through the system. Besides, the RBA would look a little silly cutting rates again to stimulate housing further when it’s also firing warning shots about lenders and borrowers being in danger of getting carried away.

Yes, the labour market has remained soft, but that is as expected. Indeed, the RBA credits a continuing weak labour market over the rest of this financial year with keeping inflation down even as the Aussie weakens. No surprise or change of outlook there then.

Retail sales also have been soft and Wednesday’s ABS count of August sales won’t be good, but industry liaison is likely to tell the board there has been an election-related pick-up this month. The business and consumer confidence lift in anticipation of a change of government has carried through after the event.

More importantly for the bigger policy picture, the Tweedledees of the new government are maintaining the same sort of stimulatory fiscal policy as the previous Tweedledums, so the risk of a negative shock there has receded.

Our banks are officially strong and have money to lend if people and businesses want to borrow more, which the confidence thing and the housing pick-up should in time encourage them to do.

So, all that lot points to rates remaining steady and for quite some time. The only negative over the past four weeks has been the Australian dollar’s rise on the Federal Reserve delaying the start of tapering – but that’s about them, not about us, and it is only a delay.

Thus Tuesday’s should be one of the easier board meetings, with the main interest for members being just what seeds have been sown for a rate rise some time next year.

It is entirely reasonable for the RBA to fire warning shots when it spots problems developing – and it’s wise to take heed of those warnings. Yet the extrapolation of those warnings and some price rises into talk of a housing bubble has been inflated, so to speak. Inner Sydney and Perth are not the entire Australian housing market, and even in those two hot spots, all may not be quite what it seems.

Michael Pascoe is a BusinessDay contributing editor.

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