While ANZ economists predict 100 basis points of cash rate cuts in 2013, there's little in the Reserve Bank board minutes to support that view.
The overall tone of the RBA's December meeting remains a little dovish, but a slight upturn in the global outlook, concern about inflation and faith in the eventual impact of the rate cuts already made point to a central bank in no hurry to do a lot more.
It would take a much grimmer reading of the global and domestic economy to suggest the RBA is contemplating drastic action when “Some of the expected effects (of interest rates being below average) were starting to be observed and further effects could be anticipated over time.”
What the minutes indicate is that it was the flat outlook for non-resources capital investment that seemed to have tipped the balance in favour of this month's 25-point trimming of the cash rate, a decision made possible by lower wages growth. The minutes make a point of telling RBA watchers that the slower growth in mining capex did not come as any surprise to the Martin Place mandarins – it had already been included in the banks modelling.
There wasn't a matching claim of prescience over weak non-mining capex: “Investment outside the mining sector increased in the September quarter, although the capital expenditure survey suggested that there would be negligible growth, or even a small fall, in 2012/13 as a whole. Members noted that survey measures of business conditions had generally declined further and measures of capacity utilisation were a bit below average, with the bank's liaison suggesting that some firms were investing only to cover the depreciation of existing capital. Members noted that there was also concern in the non-residential construction industry about the modest pipeline of work once the existing wave of committed resource projects was completed. While growth in credit to unincorporated businesses continued at a measured pace in recent months, growth of business credit overall had slowed.”
There is continued faith though in the role residential construction should play as easier monetary policy does its work: “Forward-looking indicators of residential construction over recent months, including building approvals, continued to point to a modest recovery in that sector over the period ahead. This was likely to be supported by the pick-up in dwelling prices, sales activity and rental yields over recent months. In addition, loan approvals had moved a little higher since the middle of the year.”
The minutes read as if this month's cut was the delayed delivery of a decision already taken at the November meeting when the bank surprised the majority of tipsters by not moving: “At the board's previous meeting, members had considered that further easing may be appropriate in the period ahead, but had decided to maintain the existing setting for the time being, in view of the slightly higher-than-expected September quarter CPI and somewhat better information about the world economy.”
Well, the world economy continued to get “somewhat better” between the November and December meetings, particularly with further confirmation that China's growth had stabilised and the US picking up a touch more. Europe, well, Europe will always be with us.
The two particularly interesting things about today's minutes though are what receives no discussion and the chicken-or-the-egg role of our soft labour market.
As the Greek chorus grows for Australia to somehow join the currency wars, the only mention of the Aussie was this: “The Australian dollar was little changed, remaining at a high level.”
So there. Just 'tis. The reality is that it's not feasible to deploy the couple of weapons that Australia use to try to counteract America's currency debasement.
No, we can't just turn on the printing presses and flood the market with Australian dollars. We actually have a reasonably strong economy and such an action would quickly come back to haunt us. And, politically, we're a nation that finds it difficult to even delay a return to budget surplus, so quantitative easing is not an option for us unless the economy really tanks. It is unrealistic to suggest we can take on the global forex market, draw a line in the iron ore and peg our currency to … what? As a nation that needs to borrow to fund its growth, burning international investors is not a good idea.
And we've already seen how cutting interest rates has had negligible impact on the exchange rate when there are greater issues. Matching the Americans, Europeans and Japanese in cutting rates to near zero would still leave us with a more desirable currency and we are not in such economic trouble as to be inflation-proof and therefore able to try it.
Which is where the cause-and-effect of our soft labour market comes in. Even while trimming rates, the RBA warned that “ongoing productivity growth and a further sustained moderation in wage growth would be needed” to keep inflation under control and, therefore, make stimulatory monetary policy possible: “Recent data indicated that, to date, there had been a small decline in the growth of wages, which was consistent with the softening in the labour market seen over the past year. The forward-looking labour market indicators had generally declined recently, suggesting that employment growth would remain modest in the months ahead ...
“At this meeting, the information on labour costs and softening labour market conditions suggested that the inflation outlook still afforded the board some scope to provide additional support to demand. Further confirmation that the peak in resource sector investment was near, and that the short-term outlook for non-resource investment remained subdued, indicated that there was a case for the board to provide that support.”
So if you want lower rates to stimulate growth, you have to have a weak labour market subduing wages growth – and if you have a weak labour market with rising unemployment, you want to stimulate growth with lower rates.
As various RBA heavies have been telling us, the golden answer to sustainable, non-inflationary wealth creation remains productivity growth. Someone should try informing the Maritime Union of Australia as its members strike in Fremantle over the possibility of having productivity growth imposed on them and despite having already locked in a 20 per cent pay rise over the next four years.
Michael Pascoe is a BusinessDay contributing editor.