How close the two decisions of the RBA are – to cut rates today and to not cut rates a month ago – is demonstrated by how little difference there is in the governor's brief post-meeting commentaries.
You could pretty much swap November and December around and not notice.
There was no smoking gun that demanded a rate cut last month and there's none offered to justify this month's, other than a subtle suggestion that the RBA was a little concerned about inflation last month and is less so today.
The RBA wants more activity on the housing front. Picture: Glenn Hunt Photo: Glenn Hunt GTH
The bank is still saying the effect of previous monetary easing is yet to work its way through the system, so to read between the lines, it seems our central bankers have become a tad impatient about their lower interest rates stimulating demand, especially for new housing. Hence the latest trimming.
No, Solly and Gerry, the performance of your shops isn't driving RBA policy. Instead, it's the need to encourage building investment to pick up the growth slack as the construction phase of the commodities boom peaks and our state and federal governments' mini-fiscal cliff runs its course. RBA to housing industry: giddyup!
The key paragraph in the governor's statement is this:
“Private consumption spending is expected to grow, but a return to the very strong growth of some years ago is unlikely. Available information suggests that the near-term outlook for non-residential building investment, and investment generally outside the resources sector, remains relatively subdued. Public spending is forecast to be constrained. On the other hand, there are indications of a prospective improvement in dwelling investment, with dwelling prices moving a little higher, rental yields increasing and building approvals having turned up.”
As Glenn Stevens explained in his mid-year speeches, the real per capita consumption growth we've averaged since mid-2009 of about 1.5 per cent is quite nice.
It's sustainable and allows the return to a healthy household savings ratio. But it's not the 2.8 per cent growth many businesses had come to regard as normal over the long boom from the mid-1990s to the global financial crisis. Retailers have to adjust to that reality rather than vainly hope the RBA will let loose another consumption binge.
With states trying to tame their debt, bi-partisan pursuit of a surplus all the rage in Canberra and the next likely federal government promising to slash and burn the public service, describing the public sector as “constrained” is, well, constrained.
Last week's private fixed capital investment intentions survey showed not much happening on that front either, so housing growth more than ever has become the great hope of treasury and the RBA.
Which is why today's building approvals figures make the governor's statement sound a little hopeful. Note that Stevens doesn't say there are indications of improvement in dwelling investment, only “of a prospective improvement”.
The preconditions for growth in dwelling investment are there, but the turn up in building approvals is still anaemic. If there was wavering about a rate cut or not today, it could have been resolved by the building approvals figures at 11.30am.
Sure, the trend series has growth of 6.2 per cent in total dwelling units approved from October 2011 to October 2012 (and just 1.2 per cent for private sector houses) – but the growth has gone flat since mid-year.
There is a degree of faith required here that if we ease monetary policy, spending and investment will come. The RBA is suitably cautious about over-cooking stimulus while the more voluble nervous nellies want the spending binge back. And they want it now. Given that overall growth hasn't fallen in a hole, the RBA continues to stimulate warily.
What it hasn't done is rush to “emergency levels” of rates, despite what the headlines claim and the simple measure of the cash rate suggests.
In another place, economist Stephen Koukoulas neatly summarised why the “emergency rates” screamer is wrong:
“For the Chicken Littles like [Joe] Hockey, a few home truths need to be laid out. Any sensible policy observer would know there is a lot more to economic policy than just interest rates. One vitally important influence on the economy is the stance of fiscal policy.
“During the GFC, Commonwealth government spending rose 12.7 per cent in real terms in 2008-09 with a further 4.2 per cent rise in 2009-10. Together with the drop in tax revenue as the government allowed the fiscal automatic stabilisers to kick in, the budget balance swung almost 6 per cent of GDP in two years. From a surplus of 1.7 per cent of GDP in 2007-08, the budget moved to a deficit of 4.2 per cent of GDP in 2009-10.
“This massive fiscal stimulus was being injected into the economy when the RBA had the 3 per cent emergency interest rates in place.
“In the current non-emergency period, the fiscal position shows that real government spending will be cut by a record 4.4 per cent in 2012-13 and that the budget balance will swing from a deficit of 4.2 per cent in 2009-10 to a surplus of 0.1 per cent in 2012-13. This is a swing of 4.3 per cent of GDP in three years.
“This means there is a difference of over 10 per cent of GDP in the change in the budget balance between the time of the GFC and now. In 2012-13 dollar terms, this is worth around $155 billion. With private sector debt currently around $2.2 trillion, this $155 billion swing in the budget is the equivalent of a 7 per cent differential in interest rates.
“So rather than emergency interest rates complementing emergency fiscal settings, as was the case during the GFC, the current policy mix has easier monetary policy working to offset the restrictive effects of one of the most contractionary fiscal settings ever seen in Australia.”
Thus, in the context of our mini-fiscal cliff, we don't have “emergency” interest rates, even though the cash rate is at 3 per cent.
There is still room for more trimming, but no hint of that in the governor's statement today. We now have a two month break to see if rates have become cheap enough to act as a carrot for more investment and spending and as a stick to get the cash sitting in bank accounts to seek more productive use. It should be an interesting summer.
*Michael Pascoe is a BusinessDay contributing editor.