RBA Turns Jawboning Focus To Property
The warnings by both Federal Treasury Secretary John Fraser and Reserve Bank Governor Glenn Stevens over Sydney house prices in recent times has led some analysts to suggests interest rates are even less likely to fall further this year.
After all, if both the Treasury and RBA think we have a property bubble on our hands, it surely suggests they aren’t likely to inflate it further by lowering rates.
But I have a completely different take of what these senior economic officials maybe up to.
It’s called jawboning – yet another tool in the policy maker’s arsenal, which is brought out in times of emergency. Jawbone too much and markets lose interest in what you’re saying. But reserve it for special occasions, and people sit up and take notice.
What is jawboning? If you don’t know, it’s jargon for making public pronouncements on certain issues in the hope of influencing market behaviour.
The RBA most often uses jawboning with regard to the Australian dollar. If the $A is too high and the RBA is loath to cut interest rates to help bring it down – for fear of overly stoking, say, property prices, it might try telling the market the currency is overvalued and destined to fall.
By contrast, if the $A is too low (as when it dipped below $US50c in 2001 for example), the RBA might come out proclaiming it’s undervalued and destined to rise.
In the least, such pronouncements can help prick rampant self-reinforcing expectations at the top and bottom of currency cycles. As the RBA once termed it, it’s like putting “sand in the wheel.”
Indeed, the RBA has tried - with mixed success – to help talk down the $A over the past few years. Although the $A is still high, it’s hard to know whether it would be much higher were it not for the RBA regular jawboning efforts to send it lower. We can’t know the counter factual.
Back in late 2003, moreover, the RBA began to worry about national house prices and said as much – following up with an interest rate hikes in November and December of that year.
Fast forward to 2015, and the RBA’s rhetoric with regard to Sydney house price has begun to ratchet up again. In response to a question about house prices this week, Governor Stevens said “Yes, I am concerned about Sydney. I think some of what's happening is crazy.” That follows on from comments from Treasury’s John Fraser suggesting Sydney “unequivocally” had a property price bubble.
Does this mean the RBA is about to raise interest rates? Far from it. As Stevens went on to explain in this very same answer, house prices in the rest of the country aren’t rising anywhere near as rapidly and noted that with regard to Sydney “we've got a national focus..and [so Sydney] that just increases the complexity.”
Stevens also noted in this prepared speech that growth in the year to June 2015 was likely to come in below 2.5%, implying quarterly growth of no more than 0.6% - a big come down from the blistering 0.9% pace in the March quarter. Indeed, the March quarter result was boosted by a one-off surge in mining export volumes – due to better than usual cyclonic conditions – and payback should be expected this quarter.
Summing up, Stevens conceded “as things stand, the economy could do with some more demand growth over the next couple of years.” And noted “we remain open to the possibility of further policy easing, if that is, on balance, beneficial for sustainable growth.” The explicit easing policy bias is back!
Of course, Stevens would prefer not to cut interest rates further – noting this would work though the consumer sector, which given already high household debts, seems least able boost spending notably than the business or government sectors.
Instead, he would prefer a much weaker $A sometime soon so as to help restore business competiveness and boost their expansion plans. And we would prefer a better approach to infrastructure spending from both the State and Federal Governments.
But at the end of the day, the buck stops with the RBA if neither a weaker $A or stronger infrastructure plans come to light anytime soon.
To my mind, it’s for this reason the RBA and Treasury may be now trying to jawbone the Sydney property market.
To the extent some of the irrational exuberance among investors is pricked by repeated official warnings, it in fact open up greater scope to lower interest rates later this year if need be. So the RBA’s warnings about Sydney property are not a warnings it is less likely to cut interest rates - but rather exploitation of another policy tool to contain the Sydney market, which might in fact make it easier to cut interest rates later this year to support the rest of the economy if need be.
David is one of Australia's leading economic and financial market analysts. His is Chief Economist with BetaShares, and an Economic Advisor to the National Institute for Economic and Industry Research (NIEIR). His has held former roles as senior commentator with The Australian Financial Review, Macquarie Bank interest rate strategist and Federal Treasury economist. He is also author of the online e-book, TheAustralian ETF Guide.