This is a long post with excerpts (bolding is mine) from a very worthwhile JP Morgan research note in the wake of Glenn Stevens’ speech yesterday:

  • The most important RBA communication for some time
  • Changed the tone of the official discourse on “high” AUD … punched a hole in the case for early rate hikes owing to housing strength … described how the much-anticipated transition in the sources of growth very much remains a work in progress.

(Stevens) … clearly thought the market needed some educating

  • He … said the market is wrong in underestimating the risk that AUD could fall significantly and that the Bank has ammunition to move on policy if needed (… talking about rate cuts, not hikes)
  • He appeared to endorse market pricing implying a near term rate cut is more likely than a hike

File this away for future reference:

  • Said the “period of stability” phrasing favoured now would be dropped a long time before the Board even started to think about raising the cash rate … would revert to “a more normal” configuration of words before then
  • He described AUD as sitting more than “a few cents” in over-valued territory

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More

  • (His) comments on the economy sounded more downbeat than before… indicated that the pace of transition has lost steam since the summer
  • Lengthy comments on housing did much to diminish the market’s importance as a near term driver of policy, undermining the argument run by some that the RBA needed to lift rates soon to take some steam from the major capital city markets
  • Said the Board is not even thinking about raising the cash rate
  • (On) macro-prudential management, (said) APRA already has been leaning on the banks in terms of controlling their lending practices. The newswires reported him saying in the Q&A session that the use of tools by APRA would be sensible, which is a deviation, given the Bank’s previous sentiment that such efforts can be clumsy and ineffective

So, what to make of all this?

  • We have the RBA on hold for at least another year
  • Remain of the view that a rate cut in the near term remains more likely than a hike
  • The gap between AUD and commodity prices remains unusually wide … jawboning likely will continue
  • The RBA will be inactive for some time (on rate changes)
  • … we read today’s comments as further confirmation that the RBA is more sensitive to downside risks to the growth and inflation outlook than they were a month or so back. The data flow over the next few weeks will be very important in further informing this perception.

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Excellent piece from JP Morgan. With thanks.