The RBA versus the new normal of uncertainty
Despite a widespread belief that we will get another rate cut as soon as the December board meeting, don’t bank on that happening as automatically as some think after last night’s speech from RBA Governor Glenn Stevens and the release earlier yesterday of the minutes of the November 6 board meeting. That also seems to be the understanding of currency markets with the dollar remaining solid at either side of $US1.04, where it has been trading for much of the past couple of months.
This comment from the board minutes, “[m]embers considered that further easing may be appropriate in the period ahead. However, at this meeting, with prices data for the September quarter slightly higher than expected and recent information on the world economy slightly more positive, the Board judged that the stance of monetary policy was appropriate for the time being” left economists and others convinced that another rate cut is a “given” and could come as early as the December board meeting (which would then see a repeat of the 2011 rate cuts in November and December).
But keep in mind the monetary policy context: interest rates are already low, indeed, close to “emergency lows” — so low the opposition has been confused about how to describe them. In the “perpetual present” of much media coverage, this gets lost in the obsession with whether there’ll be further cuts.
In his speech last night, Stevens further qualified that statement with this comment:
“As of the most recent meeting, as the minutes released earlier today show, the Board felt that further easing might be required over time. The Board was also conscious, though, that a significant easing of policy had already been put in place, the effects of which were still coming through and would be for a while. In addition, the latest inflation data, while not a major problem, were a bit on the high side, and the gloom internationally had lifted just a little. So it seemed prudent to sit still for the moment. Looking ahead, the question we will be asking is whether the current settings will appropriately foster conditions that will be consistent with our objectives — sustainable growth and inflation at 2-3%.”
And there were other points made in the minutes to buttress Stevens’ comments from last night’s speech. Early on there were these words about how there had been a small improvement in the outlook offshore:
“… [i]nternational economic news over the past month was, on balance, more positive than in recent months, though earlier weak data had led forecasters to expect further delay in a pick-up in global activity. The pace of growth in China appeared to have stabilised in response to the earlier fiscal and monetary stimulus, with a pick-up in infrastructure construction. Timely measures of production and spending were mixed, but had generally been stronger in recent months.”
And at home the RBA saw the domestic economy had slowed from earlier in the year, but not by much:
“Overall, growth of the Australian economy had slowed from an above-trend pace earlier in the year, with recent indicators of activity suggesting that economic growth was more moderate in the September quarter.”
There’s a bit of code breaking to be done as usual with the minutes: “above-trend pace” growth for the economy is usually “bad” in that it can lead to a lift in inflation, in wages/demand, and become unstable. Sustained growth at “above-trend pace” usually brings interest rate increases.
But now the economy has slowed to a pace closer to trend, especially household consumption. Growth around trend (3-3.5%) is more comforting for the central bank. That slowing happened in tune with the rise in inflation in the September quarter, although much of it came from those sharp jumps in electricity prices, plus fruit and vegetables. There’s not much that can be done about seasonal and agricultural issues (although we could allow the import of more fruit), but there are still more power price rises to work their way through the economy, plus the impact of the carbon tax (which appears to be a touch less than Treasury expected).
While recent wage data has been encouraging in inflationary terms (so much for FWA ushering in higher wage demands), the RBA would like to see the slower pace of domestic activity press down on inflation over the next few quarters, rather than risk keeping cost pressures high by another rate cut. That is probably why rate cuts, while in the wings, will not be centre stage for a quarter or two, unless the US economy falls off the fiscal cliff in early 2013 and threatens to drag the rest of the world with it.
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