RBA puts the cat amongst the pigeons - and then tries to retrieve it.
Most news was pretty normal this week. The Greens lost another couple of senators as they tried to get their act together; The Donald continued his war of words with everyone (possibly with the exception of Mr Putin); and Tony Abbott continued to break his promise of no wrecking and no sniping.
However a couple of things put a rocket up the Aussie dollar, taking it towards the US$0.80 mark when most analysts were probably feeling comfortable that any currency risk was on the downside. Firstly Janet Yellen made some soothing remarks about the potential for rate rises in the US, which had the effect of softening the Greenback. And then the RBA decided to announce that the neutral rate for Australian interest rates should be 3.5%, which, given the current historically low rate of 1.5%, gave the markets a serious case of the jitters.
So much so that Deputy Governor of the RBA, Guy Debelle slipped a retraction, or explanation, into his speech to the CEDA Mid-Year Economic Update in Adelaide today, saying "no significance should be read into the fact that the neutral rate was discussed" and that "at most meetings the Board allocates some time to discussing a policy relevant issue in more detail, and on this occasion it was the neutral rate".
Hedge Clippings' guess is that henceforth the RBA will think twice before announcing all the "policy relevant issues" they discuss at their meetings.
The simple fact is that the prospect of a 200 basis point rise in the official rate from the current level of 1.5% would have more than dampened the "animal spirits" that the Deputy Governor also referred to in his speech as one of the major drivers of economic growth, and therefore RBA's views on monetary policy. It might have solved the current property price problem, but would have created a property crisis of its own in its place.
For those with little to do on a Friday evening, there is a link to the speech here, and it actually makes interesting reading if you enjoy that kind of thing. Assuming it was written well ahead of time, we would imagine that the two sentences regarding the "neutral rate" were probably a late edit, or an addition following the market's reaction.
