In an address to an Australian and New Zealand investment conference, Reserve Bank of Australia Deputy Governor Ric Battellino appeared to signal a “wait-and-see” approach to policy settings.
As always, Deputy Governor Battellino’s comments need to be viewed through his historically hawkish lens. Nonetheless, in our opinion, the tone of the speech signalled no urgency on the part of the RBA to act.
In the concluding “Looking Ahead” section of his speech, Mr Battellino stated:
- “As I have noted, as yet there have not been signs outside Europe that the rate of growth of economic activity has taken another step down since the recent bout of financial volatility. It is, however, still too soon to conclude that this will not happen.”
- “The question is whether this will flow through in due course to the large emerging economies that have been the main force driving global GDP growth in recent years. Some flow-on is, of course, to be expected, even if the situation in the advanced economies does not deteriorate further. However, so far at least, there has not been the debilitating freezing up of trade finance that damaged Asian economies in 2008.”
- “More generally, domestic demand in these economies has considerable momentum and, should it slow more than the authorities desire, they have considerable scope to provide support via monetary and fiscal policy, unlike in many advanced economies. The fact that inflationary pressures in many of these economies seem to be peaking may provide room to do so.”
- “Overall, while it is possible that the global economic situation might take a sharp turn for the worse, at this stage the Bank’s central scenario is that global GDP growth will be broadly in line with its long-run average over the period ahead. That would create a reasonably benign environment for the Australian economy. The global situation remains fragile, however, and will require careful monitoring.”
Bottom line:
The Australian Bureau of Statistics introduces new CPI weights that are likely to deliver a more benign inflation backdrop temporarily, at least, for the RBA. That in turn gives it the capacity to respond more easily to any deterioration on the global growth front. To date, however, the doomsday scenario implicit in global market pricing, including Australian interest rates, has failed to materialise.
Accordingly, the RBA’s (or at least the deputy governor’s) central scenario appears to be that “global GDP growth will be broadly in line with its long-run average over the period ahead” and “that would create a reasonably benign environment for the Australian economy.”
To be sure, the RBA is ready willing and able to act, if needed. That has always been the case and most likely always will be. Deputy Governor Battellino and his hawkish lens just do not see that the “need to act” has arrived.
BARCLAYS CAPITAL
INTEREST RATES RESEARCH | ASIA-PACIFIC INSTANT INSIGHTS