RBA could take a breather and let the government do its bit

There was no surprise for the markets in Tuesday's rate cut, but many will be surprised the Reserve Bank also cut its easing bias. The implied message from RBA governor Glenn Stevens is that a 2.5 per cent cash rate should do it.

There was no surprise for the markets in Tuesday's rate cut, but many will be surprised the Reserve Bank also cut its easing bias. The implied message from RBA governor Glenn Stevens is that a 2.5 per cent cash rate should do it.

The big difference between the brief statement from Mr Stevens after Tuesday's board meeting and that of a month ago is all in the final sentence.

Last month, his final word was that scope existed for further easing, if required. Now it is back to the old pre-easing bias catch-all: "The board will continue to assess the outlook and adjust policy as needed to foster sustainable growth in demand and inflation outcomes consistent with the inflation target over time."

Yes, the door is open to more cuts, but there's not a suggestion the bank might think they could be needed. That final sentence equally means the door is open to a rate rise somewhere down the track.

So the monetary doves appear to have had their last flutter and the emperor penguins have moved in for a while - sitting pat being the most likely outlook. And that in turn could be an indication that the decision to cut was perhaps not the sure thing the market had believed.

Inflation still isn't a problem for the RBA despite the Australian dollar depreciating by 15 per cent with more falls possible. Now it's the weak labour market that is expected to keep prices down.

"The unemployment rate has edged higher. Recent data confirm that inflation has been consistent with the medium-term target. With growth in labour costs moderating, this is expected to remain the case over the next one to two years, even with the effects of the recent depreciation of the exchange rate."

The statement makes the now-usual observation that the economy has been growing "a bit below" trend and is expected "to continue to do so in the near term as the economy adjusts". What's implied is that the economy is indeed adjusting.

A better feel for the decision to cut the cash rate and the easing bias should come from the RBA's quarterly statement on monetary policy to be released on Friday. What might well be in that publication is that the monetary and fiscal policy are now on the same page after a year of heading in different directions. With the bigger federal deficit now doing some of the stimulatory work, maybe the RBA can take its hand off the monetary lever for a while.

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