RBA rate decision – no easing meets expectations

Even though non-mining growth remains weak, the scope for additional easing is somewhat limited at this time, even though a pick-up in business sentiment and domestic activity should occur after the Federal election campaign. Evidence of this limited scope is apparent from a gradual change in wording by the RBA, as explained below. While lower rates had been fuelling established house price growth, not the construction that the RBA really wants, the consumer has not changed his/her “spots”; he/she remains very conservative, even with lower nominal interest rates.

Statement

The following points are evident from the statement:

Global growth: Global growth comments were much the same as the prior meeting, where the RBA noted that global growth was somewhat lower than trend, and the global inflation comment changed from noting  that inflation had “moderated in recent months”, to the observation that “inflation in most countries remains well contained”.

• Financial market developments: As being consistent with the prior statement, the RBA acknowledged the increased volatility in financial markets, as noted below, which is much the same as the prior statement,

Globally, financial conditions remain very accommodative, though the recent reassessment by markets of the outlook for US monetary policy has seen a noticeable rise in sovereign bond yields, from exceptionally low levels. Volatility in financial markets has increased and has affected a number of emerging market economies in particular.

• Domestic economic developments: Some acknowledgment that the economy was following a sub-trend growth pattern was evident in the statement, where some further evidence of prior easing was beginning to be felt, and the RBA acknowledged as such,  

The easing in monetary policy since late 2011 has supported interest-sensitive spending and asset values, and further effects can be expected over time, including from the declines in rates seen over recent months. The pace of borrowing has remained relatively subdued, though recently there are signs of increased demand for finance by households.

Recent declines in the Australian dollar have been wholeheartedly accepted by the RBA, as a very positive development, as the higher currency was seen to be hampering the transition in to non-mining sector growth, so the RBA repeated the prior comment on the AUD,

The Australian dollar has depreciated by around 15 per cent since early April, although it remains at a high level. It is possible that the exchange rate will depreciate further over time, which would help to foster a rebalancing of growth in the economy.

• Inflation: Even though the currency had declined, the RBA remains fairly happy to re-affirm the prospects that inflation will remain at the medium-term target levels for the next few years, as the following assessment by RBA indicates,

In Australia, the economy has been growing a bit below trend over the past year. This is expected to continue in the near term as the economy adjusts to lower levels of mining investment. The unemployment rate has edged higher. 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.

• Final paragraph: Here, the RBA further pared back the final paragraph, by excluding reference to there being “further scope” to ease. Rather, the RBA simply affirmed that the current setting was appropriate, as the RBA noted,

At today's meeting, the Board judged that the setting of monetary policy remained appropriate. 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 target.

Now, compare to this to the prior final paragraph, from the Media release from the 6 August announcement (# 2013-15),

The Board has previously noted that the inflation outlook could provide some scope to ease policy further, should that be required to support demand. At today's meeting, and taking account of recent information on prices and activity, the Board judged that a further decline in the cash rate was appropriate. 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 [emphasis added].

Finally, compare this with the final paragraph in from the Media Release from the 2 July announcement (# 2013-13),

At today's meeting the Board judged that the easier financial conditions now in place will contribute to a strengthening of growth over time, consistent with achieving the inflation target. It decided that the stance of monetary policy remained appropriate for the time being. The Board also judged that the inflation outlook, as currently assessed, may provide some scope for further easing, should that be required to support demand [emphasis added].

A gradual change in RBA language is apparent, especially in the final paragraph of the RBA statement, as noted above, in three steps:

• From indicating a reference to the possibility of further easing in July statement
• To placing that to further easing reference in past tense in the August statement, and
• To no reference to the possibility of further easing in the September statement.

Conclusion

We need to listen carefully to what the RBA is saying, and sometimes we need to compare and contrast statements. In this case, we can see that the scope for easing policy further, past the zero real level of 2.50%, is not apparent at this time. We have endured much over the past nine month election period, and such a long election cycle has crippled business expansion when the consumer also remains unwilling to spend. All that is about to change, and we will see a spurt of growth after the election is decided. Some commentators may even speculate about interest rate rises, so be ready for this speculation when it arises. In contrast, we expect that the consumer will continue to do what they have already done; they will remain the roadblock to non-mining sector expansion, and growth will settle at a sub-trend growth, while unemployment resumes an upwards march, in the early part of 2014. At this point, we think the RBA may consider further monetary accommodation. However, we, and the RBA, need to assess the strength of the post-election economy, and what the trajectory of global growth perceptions might be in the next few months.