Reading an RBA rate hint

As expected the Reserve Bank has left official interest rates unchanged. It remains, however, ready to cut again if required.

It is the bank's willingness to ease further, if required, rather than the decision to hold the cash rate at 3 per cent that is slightly surprising, given that the recent run of economic data has if anything surprised on the upside.

The sharemarket has been surging, housing markets appear to have turned with values rising again, consumer confidence appears to be firming and the battered retail sector is finally showing some signs of life. Commodity prices have bounced back from last year's falls.

According to the Reserve Bank there is moderate growth in private consumption spending occurring, resources exports are rising and growth has been close to trend.

Externally, the US is generating some modest growth, Europe is (surprisingly, given the chaotic outcome of the Italian election) stable, albeit weak. While the bank said growth in China has stabilised ‘'at a fairly robust pace'' it's a bit early to judge how much of a negative impact this week's crackdown on property investment might produce.

Overall, therefore, with the full effect of last year's succession of rate cuts yet to be felt, there was no obvious reason for the bank to refer to its ability to support demand if necessary through further rate cuts. That reference does tend to indicate it is still concerned about the outlook.

That may be related to the peaking of the investment phase of the resources boom that is expected to occur this year and the uncertainty, given the continuing strength of the Australian dollar and the continuing weakness of demand for credit from businesses and consumers despite the steep fall in borrowing costs, about where the growth will come from as the level of investment in the resource sector subsides.

Given that the very substantial reductions in interest rates that have occurred so far have failed to have much impact on the behaviour of businesses and consumers, another rate cut might not have any more material an effect.

Maintaining a bias towards easing – or at least indicating that it has that bias – could, of course, have a different audience in mind to Australian businesses and consumers.

With, it appears, much of the developed world attempting to use their monetary policies, and big doses of money printing, to drive down the value of their currencies and drive up the competitiveness of their exports, the Australian dollar has refused to reflect the reality of the lower commodity prices, the tapering of the resources investment boom and the very subdued state of the non-resource sectors of the economy.

The only weapon in the Reserve Bank armoury that can be deployed in response to the currency wars, in which Australia is an innocent bystander largely powerless to protect itself, is to reduce – or threaten to reduce – the real rates of returns on offer from the domestic bond market.

Hinting that there could be more rate cuts in future is one way to try to keep a lid on the currency and soften the effects it is having on the trade-exposed areas of the economy. Jaw-boning is a tactic often used effectively by central bankers to influence markets and an obvious one for the Reserve Bank to resort to given the lack of actual firepower available to it to resist the forces driving the dollar.