Economists say markets got ‘dovish’ Debelle wrong

“My sense is that the light of day has provided a bit more context to his remarks for most people,” said Deutsche Bank senior economist Phil O’Donaghoe.

“When you think about the context of the speech, a look back at the GFC, we shouldn’t be at all surprised about a frank discussion of current policy options. I think that was entirely the point. I certainly do not think this speech amounted to a change in view from the bank.”

During his speech in Sydney, Dr Debelle said that the anticipated next move higher in rates “is some way off”. But futures markets and the median economist forecast were already positioned with a wait in mind. A full rate cut is not fully priced in until 24 to 36 months out.

“Should that turn out not to be the case, there is still scope for further reductions in the policy rate,” Dr Debelle continued. “It is the level of interest rates that matters and they can still move lower.” In unscripted comments, he later said the economy was in “unchartered territory” with regard to the fall in house prices coinciding with declining unemployment and reasonable growth.

Macquarie senior economist Justin Fabo thought the market was getting nervous on the domestic housing market.

“I’d say he was pretty dovish, but more accurately I think he was just saying that they just don’t know how the housing credit situation is going to play out,” he said.

“I suspect they are getting much more nervous about the supply of credit, hence Guy’s shot across the bow to the majors about their ‘similar behaviour and reaction functions’ currently.”

Dr Debelle warned that the homogeneity of the Australian banking system could be a weakness in future crises, specifically referring to how the banks respond to a deteriorating housing market.

HSBC chief economist Paul Bloxham said the deputy governor also highlighted a number of bullish aspects about the economy, specifically the labour market.

“What was clear from the speech, and the questions and answers that followed, was that while the economy is performing well and the labour market remains strong, the RBA is unlikely to feel the need to cut, even with inflation below the mid-point of the target band,” he wrote.

Although slower growth “has shaken the growth story a bit recently”, the deputy governor seemed “quite keen” to highlight the low unemployment rate and jobs momentum.

Mr Fabo noted: “The bank is clearly more nervous about the domestic housing credit situation than they have embodied in their macro outlook.”

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