Stevens Record Shows Bets RBA on Hold Due for SurpriseMichael Heath
Money markets predict central bank Governor Glenn Stevens will hold Australia’s cash rate steady for at least a year. History suggests he’ll spring a surprise.
Stevens, 55, has either raised or cut the benchmark rate 26 times since his tenure began in September 2006, the most among major developed-world peers, according to data compiled by Bloomberg. His activism puts him closer to central bankers in commodity-rich developing nations like Brazil than wealthier countries in Europe and North America.
Traders are pricing in no chance of an increase in the Reserve Bank of Australia’s cash rate in the next 12 months, according to a Credit Suisse Group AG index, as a waning mining-investment boom, forecast rise in unemployment and renewed currency strength prompted the authority to keep its easing bias intact after cutting the benchmark to a record-low 2.5 percent. Working against that bet are accelerating home price gains in one of the developed-world’s costliest property markets.
“You can quite often find that the RBA does surprise the markets,” said Paul Bloxham, chief Australia economist at HSBC Holdings Plc in Sydney who is also on the RBA shadow board of economists, which assigns probabilities to future cash-rate moves. “The RBA has had previous experience at using its monetary policy settings to lean against the wind when asset prices are inflating.”
The central bank wrong-footed markets in October 2009, when it began its last tightening cycle as house prices accelerated and China’s resource demand rebounded, and again with its most recent rate increase in November 2010.
Stevens faced criticism in 2008 when he tightened policy in March as a worldwide credit crunch began to unfold. Rupert Murdoch’s Sydney tabloid the Daily Telegraph led its front page with a picture of Stevens and the headline: “Is This The Most Useless Man in Australia?” after he raised rates to a then 12-year high of 7.25 percent. Markets and economists had expected that move.
The RBA is currently balancing low rates that are driving up housing prices against renewed strength in the local dollar - - among the best performers amid the group of 10 currencies tracked by Bloomberg since late August -- that is constraining industries exposed to exports.
The RBA will keep rates steady when it announces its decision in Sydney on Nov. 5, according to all 31 economists surveyed by Bloomberg News.
Stevens, in a speech yesterday, urged banks and borrowers to be realistic about future property price gains in Australia and noted growth was increasing “quite quickly in some pockets” of the country.
“Investor participation in housing in Sydney, in particular, is becoming noticeably stronger,” Stevens said. He added that given credit growth is between 4 percent and 5 percent per annum at the moment, it is “a little too early to signal great concern” over price gains.
Su-Lin Ong, Sydney-based head of Australian economic and fixed-income strategy at Royal Bank of Canada, said she detected “a little more concern” over the strength and concentration of investors in the housing market. His speech was “a reminder that the RBA was keeping an eye on credit growth,” she said.
A key factor that could keep Stevens on the policy sidelines is the strength of the Australian dollar, which has risen more than 6 percent since Aug. 30. It has been supported by the Federal Reserve’s decision to delay unwinding its bond buying program. The Australian dollar traded at 94.81 U.S. cents at 4 p.m. in Sydney.
“These levels of the exchange rate are not supported by Australia’s relative levels of costs and productivity,” Stevens said yesterday. “Moreover, the terms of trade are likely to fall, not rise, from here. So it seems quite likely that at some point in the future the Australian dollar will be materially lower than it is today.”
Australian new-home sales jumped 6.4 percent in September from a month earlier, the biggest gain in 17 months, a Housing Industry Association report showed today. The increase was led by apartments.
Elsewhere, Japan’s outlook for industrial production improved on strength in domestic demand, the trade ministry said, adding to signs that Prime Minister Shinzo Abe can drive a sustained pick-up in the world’s third-biggest economy.
Spain’s economy probably expanded 0.1 percent in the third quarter from three months earlier, according to the median estimate in a Bloomberg survey. Germany’s unemployment rate probably held at 6.9 percent in October, a separate survey showed.
In the U.S., consumer prices probably rose 0.2 percent in September from a month earlier, according to economists surveyed by Bloomberg, while a private report may show companies added fewer workers in October than a month earlier.
Since September 2006, when Stevens took the helm, the RBA has shifted rates 26 times, compared to eight moves by the Fed, 18 by the European Central Bank and 13 for Canada. That is the most moves among major developed economies. Israel, with a gross domestic product of about $260 billion, has adjusted policy more than Australia.
Stevens has run two tightening cycles and two easing cycles in his seven years, raising rates to a peak of 7.25 percent in March 2008, and then slashing them to a then 50-year low of 3 percent in April 2009. He was the first Group of 20 central banker to raise in October 2009, bumping rates up six times to 4.5 percent by May 2010, with one more quarter-point increase in November 2010 to 4.75 percent, the highest level in the developed world at that time.
“You could say there was an underestimation at the time of the persistence and the effects of the global crisis on Australia,” said James Morley, professor of economics at the University of New South Wales and also a member of the shadow RBA board and a former research fellow at the Federal Reserve Bank of St. Louis. “The Fed was certainly signaling they were beginning their forward guidance policies.”
Stevens stood pat from November 2010 until November 2011, when he began the current easing cycle that reduced borrowing costs by 2.25 percentage points through August. The central bank repeated in minutes of last month’s meeting released Oct. 15 that it retains the option of reducing rates again as it gauges the impact of “substantial” stimulus on the economy.
“Australia is very subject to global forces that move a lot and so the RBA is more active than other central banks,” said Bloxham, a former RBA economist. “It’s a reflection of the fact that we are a small open economy.”