RBA governor Glenn Stevens. Photo: Reuters
The Reserve Bank announced a record low cash rate with a record low number of words on Tuesday: just 371 of them, a dozen fewer than the previous minimalist milestone, in June.
Perhaps the aim is to get the statements down to tweetable length: ''Cash rate down 0.25 to 2.5. Close to bottom, but low inflation means there's still scope to cut and the $A is still higher than it should be'' would have done it this time around.
The dollar jumped a half a cent and the sharemarket didn't rally on the rate cut news because the Reserve didn't perfectly repeat earlier comments that it has room to cut again, but with inflation on a leash it does have the room it needs.
It is near the bottom of the rate-cutting cycle that it launched in November 2011, but its comment on Tuesday that the $A is at a ''high level'' even after a 15 per cent decline signals that it could cut again if the currency rebounds, or if other economic signals weaken.
Tuesday's cash rate cut is spreading through the economy quickly as banks pass it on. It is a process that reinforces an implicit message that there are better places to put money than fixed interest, including bank deposits, and pushes cash in the direction of riskier but more economically energetic venues, including property and shares.
Bank deposits totalled $974.9 billion in July 2007, just as the global crisis was unfurling. By July 2011, they were 55 per cent higher, at $1510 billion, as shell-shocked investors sought shelter from the crisis and the banks sought to increase deposit funding and cut back on short and medium-term debt funding that had been destabilised by the crisis.
By July 2012 they had risen to $1682 billion, and by June this year they were 6 per cent higher again, at $1783 billion. That's more than a year's gross domestic product in this country, and it's also more than the banks actually need to meet loan demand. Total credit growth in the year to June was just 3.1 per cent. Lending for housing grew by 4.6 per cent, and business lending grew by a lousy 0.9 per cent.
With this latest cash rate cut, the Reserve is targeting the cash mountain that has built up from two sides.
The cash rate cut is flowing rapidly into bank lending rates, making it more attractive for businesses to borrow and invest, and more attractive for households to borrow and then both invest and simply spend.
The central bank began its rate-cutting cycle in November 2011 when it cut its cash rate from 4.75 per cent to 4.5 per cent. The average variable home loan rate was about 6.8 per cent at the time, and had fallen to about 5.3 per cent ahead of Tuesday's cash rate cut. The small business lending rate was about 10.45 per cent in November 2011, and was about 9.2 per cent ahead of Tuesday's move. Both will go lower now.
The average term deposit rate on the other hand had fallen from about 5.5 per cent in November 2011 to 3.9 per cent ahead of Tuesday's cash rate cut. It also will fall, and as it does, yields on competing investments including property and shares will become relatively more attractive. The ASX's S&P/ASX 200 Index is currently trading at an average dividend yield of 4.8 per cent, for example.
Are the rate cuts the Reserve has engineered and the reduction in the value of the $A they have helped induce enough to get the non-mining economy moving fast enough to close the growth gap a slowing resources investment boom creates?
Unclear, but the Reserve's capacity to respond is not.
The government and the Coalition are both marketing fiscal strategies that are at best neutral for economic growth in the medium term, and possibly slightly negative. That puts the weight on the Reserve Bank, and it can bear it.
Its next meeting on September 3 is close enough to the September 7 federal election to persuade it to stay its hand at that time. It could cut after that, however, and will be on the brink of doing so if it doesn't get the $A dip it is looking for.
The existence or absence of a post-election bounce in confidence and activity would be the probable decider.