The minutes of Reserve Bank’s May 7 meeting that produced the surprise cut in interest rates make clear that the high value of the dollar had nothing to do with the decision, despite reports in The Australian Financial Review, The Australian and others.
Many reports in these papers and from private economists claimed the RBA had cut its cash rate 0.25 percentage points to 2.75% and had “joined the currency wars”, to quote a headline in The AFR on May 8 or a headline on the ABC’s The Drum website, which read “RBA sucked into undeclared currency war”, written by part-time columnist and host Alan Kohler (who is also at Business Spectator, owned by News Corp).
In fact, the RBA minutes make it clear that the board cut rates to support demand in the economy through the rest of the year. Currency wars had nothing to do with it — the high dollar was mentioned only in passing.
The key part of the minutes — the section entitled “Considerations for Monetary Policy” — makes clear the RBA’s worries that domestic demand was starting to look too soft. There are several mentions throughout the minutes that growth was “below trend” and “somewhat below trend” – RBA code for “that’s a bit of a surprise” or “that’s not we thought would happen”.
“For some months the Board had considered that the inflation outlook provided scope to ease monetary policy further, should that be necessary to support demand. Members recognised that the effects of the earlier reductions in interest rates were still working through the economy.”
And the RBA made it clear the rate cut was to get growth back to “encourage sustainable growth”, which is growth at trend (around 3.25% a year) or a bit better, given the low inflation outlook for the next year or so.
And if this rate cut is slow in working its magic, the RBA made it clear to those reading its language that there’s a bit more left from the bonus from low inflation — the bank says it used “some opt the scope” from lower-than-expected inflation to cut rates at the May 7 meeting, meaning there’s some petrol left in the tank.
Notice there is absolutely no mention (directly or indirectly) of the rate cut being used to force the dollar lower, and yet not one of those all knowing commentators on May 7, 8 and 9, have now corrected their claims that the RBA had entered the “currency wars”. Many of those same commentators and economists by the way also reckon that they can do economic/ budgetary forecasting better than Treasury. Seeing their claims about the rate cut are a crock, what value should we place on their criticisms of Treasury forecasts and the budget?
While the RBA remains concerned about softening demand later in the year, for now it’s sticking to a cautious short-term outlook:
“Growth in economic activity was still expected to be a little below trend this year, picking up gradually to be close to trend through 2014. The near-term forecast reflected the slowing in overall business investment, given the peak in the mining investment boom along with the effects of fiscal consolidation and the high level of the exchange rate. This was expected to be partly offset by growth of resources exports, a pick-up in consumption and moderate growth in dwelling investment.”
The rate cut was to make sure this outlook survives into 2014 and doesn’t go off the rails. The success we have had in controlling inflation allowed the RBA to cut the cash rate in the knowledge this wouldn’t add to inflation over the next year or so.
Now, with the dollar under parity and possibly going lower, expect the central bank to sit on its hands for a few months to see what transpires.