Having cut official rates at the onset of the federal election campaign, it was improbable that the Reserve Bank would take any further action with days to go until the election itself. The response of the Australia dollar to the inaction, however, might be a factor in future decisions.
The dollar edged back up above US90 cents above, one suspects, the level at which the RBA would like it to trade.
As Glenn Stevens said today (and as he has said previously), while the dollar has depreciated by about 15 per cent since early April, it remains high by historical standards.
"It is possible that the exchange rate will depreciate further over time, which would help foster a rebalancing of growth in the economy," he said hopefully.
It is conceivable that, in the absence of further rate cuts, the dollar may well remain relatively high.
The RBA’s own commodity prices index has been rising in recent months, rebounding from the sharp falls earlier this year.
With China seemingly having brought its slowing growth rate under control, to the point where its officials now say it will meet its target of 7.5 per cent GDP growth this year, it is possible that commodity prices will remain at levels that, while significantly lower than their peaks, are still high by historical standards.
The interaction of relatively high commodity prices and a lower Australia dollar mean that, through an Australian dollar lens, the prices of the US dollar-denominated commodities is even higher. An HSBC research bulletin this week made the point that in Australian dollar terms, the prices of commodities have actually risen 8 per cent over the past year.
That’s not necessarily a bad thing. The mining investment boom has peaked and should fall away quite rapidly, giving way to a big increase in volumes from that historic surge in investment over recent years.
If the dollar remains where it is and commodity prices don’t fall significantly – or any fall is out-matched by a corresponding decline in the dollar – that will enhance mining industry profits and activity and boost the value of the rising tide of exports. It will also help provide a base level of activity within the economy.
If the dollar remains where it is, of course, the relief for the rest of the economy will be relatively modest. However, there is an argument that the complete lack of confidence among businesses and consumers is of far greater impact on a slowing economy than the dollar.
The great hope in business is that once the election is out of the way and a ‘’normal’’ majority government is in place, there will some improvement in confidence, spending and investment.
Certainly, on the evidence to date, the RBA rate cuts aren’t having much impact. Since this rate cycle started in November 2011, official rates have been cut 225 basis points to a record low of 2.5 per cent. The only discernible positive effect — but one that the RBA won’t necessarily want to be too positive— is that house prices are starting to take off.
That will leave it in an awkward place if there isn’t a post-election pick-up in confidence and activity. It would be tempted to cut rates again to try to shake the dollar loose from its level of around US 90 cents, but would be fearful of really igniting a housing boom and potentially a bubble.
That’s why, despite saying that it would continue to assess the outlook for the Australian economy and adjust policy as needed to foster sustainable growth in demand, the RBA will be hoping to adjust official rates up (rather than down) in the not-too-distant future .
For that to happen, we need some recovery in non-resource sector growth. To get that, we probably need a lower dollar. A central banker’s lot is never easy or uncomplicated.