Michael Pascoe of the Sydney Morning Herald writes:
RBA to Australia: Yes, interest rates have risen since the last Reserve Bank board meeting, but we don’t care. Suck it up, stop whingeing and become more productive to solve your problems.
Or words pretty much to that effect in governor Glenn Stevens’s brief justification for leaving the cash rate steady today.
For the umpteenth time, the RBA has told us it’s concentrating on the big economic picture generated by the resources and capex booms – and the rest of the economy just has to adjust.
The other constant is that the RBA has plenty of ammunition and will happily use it but only if the world becomes a harsher place than now seems to be the case.
The good news of course is that the world is becoming a happier place. The governor is under no delusions about Europe having solved its problems – “Europe will remain a potential source of shocks for some time yet” – but the immediate disaster has been averted, or, in RBA-speak: “The acute financial pressures on banks in Europe have been alleviated considerably, though there is more to do to put European banks and sovereigns on to a sound footing for the longer term.”
The other source of continuing calm confidence is China. While various markets suffered knee-jerk reactions to Beijing lowering its supposed “forecast” of economic growth, Stevens repeated the RBA line that growth in China had moderated “as was intended, but on most indicators remains quite robust overall”. (What the screen jockeys missed on the downgrade headlines is that Beijing views that growth target as a base case, not as a prediction. The cadres stuck with an 8 per cent figure for years when the result was double-digits – and the rulers of command economies don’t like to be thought of as getting the game wrong. Furthermore, as China matures and simply has a larger economy, the growth has to slow to have any hope of sustaining growth. Finally, from an Australian point of view, at the most basic level, 7 per cent of 200 is still a bigger number than 10 per cent of 100. Yesterday’s reaction was nonsense.)
Meanwhile, back on the domestic front, the only real change in the governor’s brief commentary was a hint about Australia’s great restructuring having to take its (sometimes painful) course. Stevens added a new line in the now-standard summary of growth and interest rates being about average and inflation nice: “This forecast embodies an expectation that productivity growth will improve somewhat as a result of the structural change occurring in the economy.”
The RBA’s apparent insouciance about the sectors and regions doing poorly as the overall nation gets richer is based on the assumption that we’re not all helpless dolts who will simply surrender to the pain of a strong currency and die.
The RBA thinks more of us than that, expecting us to adapt to that somewhat euphemistic phrase “structural change” and become more productive to avoid the aforementioned death.
Some of that greater productivity comes from concentrating our resources on our most productive activities, i.e. resources, but some also comes from those feeling the heat in other areas being forced to work smarter to survive, moving up that challenging value chain. Doomsday forecasters in every field tend to assume that people faced with the edge of a cliff will simply keep marching towards and over it, instead of reacting and changing what they do.
The RBA assumes the nation will change, and is changing, when given no other choice. The RBA presents no case for a tightening of monetary policy, but nonetheless waves through the slight tightening that has occurred since its last meeting on the basis that, well, rates are still about average, so 10 points here or there don’t matter. Maybe somewhere in Martin Place there is a rule book after all that demands cash rate movements be in multiples of 25 points – as strange a rule as might be found in any institution. Alternatively, the RBA is claiming great predictive powers in assuming when it last cut rates that the banks would hold back in passing it all on – a process that ended up taking months to come to fruition.