RBA rate decision – easing meets expectations

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

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 evidence of prior easing were beginning to be felt and the RBA acknowledged as such yesterday,  

The easing in monetary policy over the past 18 months has supported interest-sensitive spending and asset values, and further effects can be expected over time. 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,

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 RBA indicated in the prior minutes, inflation was observed to be declining around the world.
• Final paragraph: Here, the RBA did not indicate that further scope for easing remained apparent, as widely expected in the market, although additional easing does remain a possibility, as the RBA noted,

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.

Conclusion

As the Governor indicated in a recent speech, consumer behaviour is preventing the typical transmission of monetary policy from occurring; what used to seem stimulative in terms of historical comparisons is not so stimulative at this time. Specifically, while the current nominal cash rate, now at 2.50%, would be considered very accommodative in the past, or using historical metrics, the change in consumer behaviour, which is now apparent, means that current policy is much less accommodative than it appears. This change in consumer behaviour is mainly why the RBA eased monetary policy today, so as to urge the conservative consumer to spend and invest, in the context of lower Federal Treasury expectations of Australian growth. Also, the scope for additional easing in 2013, given the lift in business sentiment that will occur after the Federal election, remains somewhat limited at this time. While further easing this calendar year is possible, it is not probable. This may be why the RBA failed to refer to the scope for further easing in their statement. After the post-election surge in activity, towards the end of the calendar year, the RBA will then analyse the available domestic data, with a view to determining how successful they have been, in terms of stimulating the consumer.