Wednesday, September 05, 2012

Situation no longer normal. The Reserve prepares to ease

It has moved to 'an easing bias'

The Reserve Bank is preparing to cut interest rates in the wake of a free-falling iron ore price and the first billion dollar wind-back of an existing mining investment program.

The Bank is ready to cut rates as soon as next month. It sees no need to wait for the traditional Melbourne Cup day board meeting after the release of the inflation figures in late October.

The Bank signalled its new bias toward an October 2 easing in the statement released by governor Glenn Stevens after Tuesday’s Sydney board meeting.

Whereas the previous statement, released in August, included some optimistic lines about the world economy, noting in particular that China’s growth appeared to have stopped slowing, yesterday’s assessment of international conditions was intentionally pessimistic.

Europe was contracting, growth in the United States was “only modest” and recent indicators in China had been weaker, adding “to uncertainty about near-term growth”. Asia was suffering at the hands of more moderate expansion in China and weakness in Europe.

Some financial market economists failed to pick up on the change in sentiment saying the Bank was “on hold and still comfortable” and had “sensibly resisted calls for cuts”.

In fact the Bank is deeply concerned about what it calls “sharp” falls in “some commodity prices of importance to Australia”. The iron ore spot price has slid near vertically from $US135 a tonne in July to around $US89 last night.

Tuesday iron ore miner Fortescue became the first big resources company to scale back an investment program already underway, postponing the development of the Kings deposit at its Solomon mine in the Pilbra until prices recover. It hopes to save $1.6 billion and will let go of ‘‘several hundred’’ staff.

The Reserve Bank regards the development as significant because other cutbacks, such as those announced by BHP were to projects that had not yet begun. It is especially concerned that Australia’s sliding commodity prices are not being matched by a sliding Australian dollar, meaning declining prices is not being offset by a more competitive exchange rate.

Addressing the Association of Mining and Exploration Companies convention in Perth Prime Minister Julia Gillard acknowledged “uncertainty out there” and a softening of growth in China.

“But let's be clear,” she said. “Reports of the mining boom's death have been exaggerated. This is a boom with three distinct phases: A prices boom - which is now passing, an investment boom - still to reach its peak and a production boom for the years and decades ahead.”

The Reserve Bank believes the inflation outlook gives it ample room to cut interest should resource prices stay low or keep falling as international conditions worsen. It will be paying close attention to economic statistics from China due in the next fortnight.

Bank forecasters believe that even with the 0.7 per cent prices boost expected as a result of carbon tax Australia’s inflation rate is unlikely to climb above 3 per cent for the next one to two years. It has pledged to “look through” the carbon-price effect in adjusting rates meaning that for rate-setting purposes it will treat inflation as if it is between 2 and 2.5 per cent, well within its 2 to 3 per cent target band.

June quarter national accounts to be released today are expected to show consumer spending strong and economic growth robust. They are unlikely to be much of an impediment to a rate cut because the Bank believes some of the strength was temporary, flowing from billions of dollars in bonus payments payments that stopped in July.

Published in today's Sydney Morning Herald, BusinessDay, and Age

Related Posts

. RBA August: Our unreasonably high dollar concerns the RBA

. RBA July: Not too hot, not too cold, done with rate cuts

. RBA June: Carbon tax angst is worrying the Bank


kymbos said...

It's hard not to be a bit cynical about economic reporting these days, Peter. Continued strong data with continued pessimisting forecasts - it seems to have been going on for over a year now.

What if today's data is strong and tomorrow's labour force numbers strong also? Do we continue to ignore a year's worth of strong data to continue to predict doom and gloom?

I know, I know - China softening, Europe bleak, US slow...

kymbos said...

Oh, and ah... were we going to revisit this:

Peter: "To be clear Kymbos, I don't believe the headline GDP figures released Wednesday. I think they will be revised down. Let's regroup in three months."

So were they revised? How does the revision affect your opinion?

The Lorax said...

John Lee demolishes the China Bulls:

China grasps for a growth alternative

Its brilliant from start to end, but here are some choice quotes:

Since the mid-1990s, urbanisation has been advancing at the rate of less than 1.5 per cent each year. Yet fixed investment has been growing at 20 to 40 per cent each year for the past decade.


Until recently, many Australian politicians, business leaders and commentators refused to accept the reality that our miners are the major beneficiary of a politically expedient growth model that does not make any economic or commercial sense.

So Kymbos, if you're so confident in Australia (and by definition China) Fortescue is looking pretty cheap at the moment!

kymbos said...

Whoops! Unemployment drops again. So there you go.

The Lorax said...

Er Kymbos, can you say backward looking data?

Check the iron ore price to see where the Australian economic miracle is heading.

kymbos said...

Remarkable how long it takes for the sky to fall, isn't it?

kymbos said...

Disappointed if not surprised that Peter doesn't address his previous comments on GDP. For anyone wondering, headline GDP figures were revised, but they were revised up, not down.

Peter, along with most MSM economic commentators, only like to report data that agrees with their preconceptions. Any data that doesn't, they now discredit.

Here is a piece that more closely aligns with the reality I see:

Peter Martin said...

"Disappointed if not surprised"

kymbos, "disappointed" means to be surprised - to have your expectations not met.

You ought to have been surprised. As far as I know I have always responded to your queries.

Give me some credit.

But sometimes I get a bit busy. I won't always respond straight away. Okay?

The headline GDP figure for the March quarter was not revised down. Although interestingly the bit I drew attention to (about us apparently accelerating our purchases of food) was revised down.

I think you're the one with preconceptions mate.

You seemed to think this week's employment figures were good news. They weren't.

I reckon I ought to get you together with the Lorax. One thinks the reality is more negative than what I report, the other more positive.

kymbos said...

Well, thank you for the semantic diversion.

Let me go through my expectation...

My expectation is that you will decide a theme and shape your macroeconomic reporting around that theme for several weeks and months. The latest is that the Australian economy is heading 'toward' a cliff. We are apparently not 'at' a cliff or 'over' a cliff, but the imagery implies that these events are ahead of us at some vague, undefined point in the future.

As such, economic data need merely point 'toward' a cliff to make a story. We don't need negative economic growth, or declining unemployment or high inflation. We need any data that can be interpreted as slightly lower than expectations to satisfy the theme.

So, economic growth: it is annualised at around 4%. Other countries would kill for it. It is holding up incredibly well around four years into a global slow down. But your reporting has focussed on its interpretation through the 'cliff' theme. Strong figures are discredited and weaker figures accentuated to fit the theme.

Similarly, unemployment: I keep waiting for headline figures to start drifting up, given the continued reporting of weakness. But they do not. We seem to be holding at historic lows - a truly stellar outcome for Australian society through a period of sustained international softness. Yes, the recent decline was due to decreasing participation, but the weakness you have been pushing should lead to unemployment increases. Secondly, if people are making choices to return to study, this is a good thing for the long term economy. (I don't know the causes, I'm just postulating).

Here's what I see. I see historic investment in mining. Truly huge numbers. Much of that investment is committed, and will be realised. Some at the margin has come off the boil. Everyone will point to Fortesque, but what about Rio and BHP et al? To me, this remains a huge buffer to international softness. I also don't see China collapsing, to our continued benefit.

I see the Ag sector having a stellar 2-3 years with full storages and American drought bringing in big export dollars for the next few years.

I think this could see us get through the next 2-3 years fairly well, by which time US and EU economies will be ticking back up.

I don't think we will be unaffected by the international economy. But I think you see our glass as half empty, when it is actually three quarters full.

This ended up a diatribe, but it's not often I get enough time to write more than a snarky comment.

PS - I love it when you call people 'mate'. Just shows they got under your skin.

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