Friday, 6 February 2009

RBA Put's Lipstick on the Pig

The RBA released it's quarterly statement on Monetary Policy today. Amongst their usual waffle the RBA released significantly revised GDP and inflation numbers but of course stopped short of forecasting negative growth or recession. The table below comes from the report.

Again it should be remembered that the RBA is a reactionary institution, you should not look to the RBA for guidance on where the economy is headed only where it has been. Just a few months ago the RBA was dribbling on about inflation and forecasting just a moderation in growth.

As the RBA acknowledges, that private sector surveys of economic conditions have fallen significantly. The AIG surveys out this week showed that the manufacturing, services and construction sectors declined for the 8th 10th and 11th consecutive months respectively. NAB surveys show confidence levels are now weaker than in the early 1990's recession.

In the absence of a large nasty event we are unlikely to see another rate cut of the magnitude of the last 4. The market currently expects a 50bps cut at the next RBA meeting. As I said back in January my earlier prediction of the RBA cash rate bottoming at 3% now looks to be on the high side with the market pricing in 2.5% by the middle of the year. That still has risks to the downside in my opinion.

Hopes now rest with the pass through effects from significant rate cuts and the fiscal stimulus package to be implemented in coming months. My opinion remains to be that monetary policy will fail to be stimulative in a deflationary debt unwind as we saw play out in the US and can only cushion the severity of the decline.

That leaves Rudd's handouts which may prop things up for a while but investors banking on a second half recovery in the economy will be sorely disappointed.