RBA could take a breather and let the government do its bit
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.
Frequently Asked Questions about this Article…
The RBA cut the cash rate to 2.5% and, importantly, removed its previous easing bias. Governor Glenn Stevens signalled that a 2.5% cash rate should be sufficient for now.
Removing the easing bias means the RBA is no longer signalling further cuts as the default path. The door remains open to more cuts if needed, but the statement also leaves room for a future rate rise. Overall, the most likely near‑term outlook is that the bank will sit pat.
The RBA says inflation has been consistent with the medium‑term target. Even though the Australian dollar has depreciated about 15%, the bank expects a weak labour market and moderating growth in labour costs to keep price pressures down.
The RBA noted the unemployment rate has edged higher. Recent data suggest the labour market is weak, and with growth in labour costs moderating the bank expects this will help keep inflation in check over the next one to two years.
Saying the economy is growing 'a bit below' trend indicates the RBA sees growth as slightly weaker than its typical pace and expects that lower growth to continue in the near term while the economy adjusts.
Yes. The article notes the bigger federal deficit is doing some of the stimulatory work, so monetary and fiscal policy are now more aligned. That fiscal support may allow the RBA to 'take its hand off the monetary lever' for a while.
The RBA's quarterly statement on monetary policy, due on the upcoming Friday, should provide a fuller explanation of the decision, the outlook for inflation and growth, and how monetary and fiscal policy are interacting.
Investors should monitor unemployment and labour‑cost growth, inflation readings, movements in the Australian dollar, and any further RBA communication (including the quarterly statement). Also keep an eye on federal fiscal policy, since it is now contributing to economic stimulus.
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