Despite the implicit bias towards further easing, the impression provided by recent Reserve Bank statements on monetary policy it would appear the bank is reasonably open-minded about whether the next movement in official rates will be up or down.
Four months after the last of the 25 basis point cut to official rates last December the Reserve Bank has left rates unchanged again and the tone of Governor Glenn Stevens’ commentary on the decision is very consistent with earlier statements.
The board retains the view that inflation remains in line with its target and that growth is likely to be ‘’a little below trend’’ over the rest of the year and that therefore an ‘’accommodative’’ stance for monetary policy is appropriate. Indeed it says that the current outlook for inflation would afford scope to easy policy further should that be necessary to support demand.
It is, however, apparent from the statement that the bank thinks risks within the global economy and financial system have lessened and that the 175 basis points of reductions to the cash rate that have occurred since this cycle began in 2011 are now having their desired, expansionary, effect.
There has been some modest growth in consumption, consumer confidence has picked up slightly and housing prices are starting to respond to the low rates and improved affordability. The Reserve Bank does not expect a return to the dis-saving financed consumer spending spree in the lead-up to the financial crisis, but nor would it want that.
There is still a tricky period ahead.
Offshore, negative real interest rates, quantitative easing programs and unsustainable public finances remain issues and potential threats. While China has stabilised its growth rate at ‘’a fairly robust pace’’ it is trying to rebalance the composition of that growth.
Commodity prices have fallen, albeit to levels that are still high by historical standards, and the peak of the mining investment boom that has sustained the economy in recent years continues to draw closer. The Reserve Bank’s hope is that as it peaks other areas of the economy will have more scope to improve.
The major question-mark over whether there can be a smooth transition from declining resources investment to growth in other sectors of the economy is the continuing resilience of the Australian dollar, which has had a chilling impact on the non-resource trade-exposed areas of the economy.
As the Reserve Bank has been saying consistently, the dollar remains higher than might have been expected given the falls in commodity prices – an historical correlation has, for the moment at least, broken down – which will continue to dampen non-resource investment and activity.
Then there is, of course, the interminable lead-up to the federal election (not that the Reserve Bank would mention that) and the looming budget, which are likely to cause consumers and business to continue to be wary and risk-averse in what has become a period of erratic and unsettling politics and policy (some might say even more erratic and unsettling politics and policy).
Thus, while it seems reasonably sanguine about the current state of the global and local economies, the retention of the bias towards further easing does signal that the bank is still sensitive to the array of potential threats to stability and growth and of the contractionary implications of the strong dollar and (probably) tightening fiscal position.
The Reserve Bank may have once hoped that the existence of that stated bias would help lower the value of the currency but, of course, the dollar remains unmoved – either foreign investors don’t believe there will be more rate cuts or they don’t care whether or not there are.