RBA’s tale of two speeds

Didn’t win the Melbourne Cup sweep. Didn’t get a number in the $100 million lotto draw. And certainly didn’t get any joy from the RBA.

I’m not sure how your Melbourne Cup day went, but that’s a pretty accurate summary of mine. And it is the latter disappointment – the RBA’s decision to leave rates on hold at 3.5% – that has me most worried.

I expected a cut yesterday, along with 20 of the 27 economists who provide their monthly predictions to financial news and data publisher Bloomberg.

There is no great satisfaction in being as wrong as most of the experts, but the fact that so many economists expected the RBA to provide further relief to borrowers does at least suggest this was a close call.

RBA governor Glenn Stevens said as much in his post-meeting statement, commenting that inflation was “slightly higher than expected” and that the outlook on the global economy was “slightly more positive” than in recent months, partly due to what the RBA sees as a stabilisation in China.

Stevens was also determined to point out that the cumulative impact of five previous rate cuts in the last 12 months is having some impact, as seen by higher share prices and higher house prices (although the October fall in house prices weakens this argument a little).

Looking at the economy from the holistic standpoint that Glenn Stevens must, you can see why this decision would have been made. The economy as a whole is growing close to long-term averages, business investment is strong and inflation is showing signs of stretching its legs.

Cutting rates to 3%, as low as we’ve ever seen them – and the same level we saw during the peak of the GFC – obviously doesn’t seem necessary to the RBA in this context.

But the holistic view is heavily influenced by the mining sector, which is driving a big chunk of economic growth and business investment.

And there are stuff-all SMEs in the mining sector.

We’re more focused on business confidence (still low), business conditions (poor), consumer confidence (absolutely frozen), retail sales (still weak), manufacturing performance (still contracting), services sector performance (still contracting), construction sector performance (still contracting, with new home sales at an 18-year low) and demand for credit (at 30-year lows, according to NAB’s business banking boss Joseph Healy).

Glenn, we’d argue that the picture for SMEs is ever-so “slightly” worse than you suggest. A rate cut would not have been a panacea for those problems, but it certainly wouldn’t have hurt.

The RBA doesn’t ignore the indicators I’ve just mentioned above, of course, as its statement yesterday made clear.

In what might have been the most interesting part of the statement, Stevens reiterated that the RBA now believes that the peak in resources industry investment is likely to occur next year, at a lower level than the bank expected six months ago.

As this investment winds back, Stevens says the RBA is “monitoring the strength of other components of demand”.

In other words, we’re trying to figure out what is going to keep the economy rolling along when the mining boom starts to really wind back.

I hope the RBA is starting to figure out the answer to that, because it’s pretty hard to see right now given the state of the SME community. I don’t really see a sector that is starting to gather speed and will be growing nicely as the mining boom slows.

Is there still time for growth to pick up in other sectors? Maybe. But a rate cut push-along wouldn’t go astray, particularly given how long cuts take to have any great impact.

James Thomson is a former editor of BRW’s Rich 200 and the publisher of SmartCompany and LeadingCompany.


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