In plain English: expect another rate cut
Interest rates aren’t like elevators. They don’t only rise and fall, they can go sideways, too, and at its rate-setting meeting, the Reserve Bank found good reasons to do the sideways shuffle.
‘‘Inflation is consistent with the medium-term target, with both headline CPI and underlying measures at around 2¼ per cent on the latest reading. Looking ahead, with the labour market softening somewhat and unemployment edging higher, conditions are working to contain pressure on labour costs. Moreover, businesses are likely to be focusing on lifting efficiency under conditions of moderate demand growth. These trends should help to keep inflation low, even as the effects on prices of the earlier exchange rate appreciation wane. The Bank's assessment remains that inflation will be consistent with the target over the next one to two years.’’
Translation: Inflation is actually sitting at the low end of our target of 2 to 3 per cent, so there’s no barrier to us cutting the cash rate further when we want to – and the forces that are keeping inflation down include some that are keeping rate cuts on the agenda, including weakness in the jobs market, one of our core areas of concern.
‘‘During 2012, there was a significant easing in monetary policy. Though the full impact of this will still take further time to become apparent, there are signs that the easier conditions are having some of the expected effects: the demand for some categories of consumer durables has picked up; housing prices have moved higher; there are early indications of a pick-up in dwelling construction; and savers are starting to shift portfolios towards assets offering higher expected returns.’’
Translation: We cut rates four times between May and December last year, pulling the cash rate down from 4.25 per cent to 3 per cent. That’s a hefty reduction, and there's evidence that it has boosted activity. Even though this variable rate-based economy spreads the cut fairly quickly, however, we don't think we have seen the full impact of those earlier cuts yet.
‘‘On the other hand, the exchange rate remains higher than might have been expected, given the observed decline in export prices, and the demand for credit is low, as some households and firms continue to seek lower debt levels.’’
Translation: It also has to be acknowledged that there's some negative issues. At around $US1.04, the Australian dollar is simply too high, for one thing. It is making our exports less price competitive at a time when domestic demand is soft, and that’s something we really don’t need. It is aloso making omports cheaper in $A terms, cdreating a double-whammy for local companies outside the mining sector.
The currency is high mainly because rates in the developed economies overseas are at or close to zero, however. Foreign money has been pouring in, to capture our still-relatively high fixed interest rates, and to hide from the northern hemiphere’s economic carnage. Another rate cut won’t change that dynamic materially. The $A is probably high until either the northern hemisphere begins growing strongly again, pushing rates there higher, or – a much worse ‘‘solution’’ – global growth stalls, killing australia’s resources economy in the process.
‘‘The Board's view is that with inflation likely to be consistent with the target, and with growth likely to be a little below trend over the coming year, an accommodative stance of monetary policy is appropriate. The inflation outlook, as assessed at present, would afford scope to ease policy further, should that be necessary to support demand.
‘‘At today's meeting, taking into account the flow of recent information and noting that there had been a substantial easing of policy as a result of previous decisions, the Board judged that it was prudent to leave the cash rate unchanged. 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 over time.’’
Translation: We have room to cut rates a bit more, and while 3 per cent is at or very close to the low for this rate-cutting cycle, we may still need to nudge rates down a bit further at some point this year. 2013 has started fairly positively, however, both here and overseas, and in both the real economy and in the markets. That gives us time to watch and listen, and we are going to use it: it’s not procrastination – its precaution.