Tuesday, 24 January 2012

The IMF and the RBA

The RBA uses IMF forecasts for the global economy when building its assessment of the local economy.  It has done this for many years.  Obviously, the RBA judges the risks around these forecasts but nonetheless, when the IMF changes its outlook for the world economy, you can rest assured the RBA will use these in its assessment of Australian growth and inflation pressures.

In its November 2011 Statement on Monetary Policy, released after it delivered its first interest rate cut for this cycle on 2 November, the RBA published and used the then IMF forecasts for global growth.  The changed forecasts from the IMF released yesterday have seen it cut global GDP growth from this time by 0.1% in 2011, 0.7% in 2012 and a further 0.6% in 2013.  The IMF forecasts for Australia’s major trading partner, China, have been cut by a little more than average in both 2012 and 2013 (by 0.7 and 0.8% respectively).

Obviously the RBA knew there were downside risks to the prior IMF forecasts during the final months of 2011.  This is why it had no hesitation in cutting interest rates in November and then December.

But as the current drafts of the RBA Board papers for the 7 February meeting are being circulated within the engine room of the RBA, the material downgrade to the global growth outlook from the IMF would create concerns that local monetary policy needs to move to an accommodative setting.  Global growth is OK, but it is coming from a dismally weak base and it is also much less robust than thought even a few months ago.

Former RBA Governor Ian Macfarlane was once asked if he had just one indicator to look at when determining his forecasts for Australia and his judgments on monetary policy, he said it would be global growth.

I dare say if current Governor Glenn Stevens was asked this now, he would have the much the same answer.  This is why the IMF downgrade matters. 


  1. Good post. I agree with this save for the 'no-hesitation' point about the December meeting, which I don't believe is correct based on both what the RBA has said, and what media folks are saying.

  2. Yes - I think RBA clearly moved on from the official IMF forecasts as they were in Nov SMP knowing downgrades like we saw yesterday were likely. A good call from the RBA. I read the media of course and note the tactics of RBA in managing expectations and they have a few high profile people to spin the yarn. Telling people is was a "close call" doesn't necessarily make it so. They do not want to create an impression (even if it's true) that they are worried about the outlook and cuts were all but a done deal. It's the same for Feb. Cheers

  3. Fair points. I tend to take what the minutes say more at face value, and suspect the RBA does not like to make a habit of burning media relationships, even tho it has been forced to do so with TM twice, and, arguably, Mitchell and Martin somewhat over the Dec meeting. My best guess is that there was a fair amount of contemplation and debate about the need to go in December. Going fwd, housing will be very interesting for the RBA...