There’s an old saying that monetary policy is a blunt instrument, but the minutes of the Reserve Bank of Australia board’s latest monetary policy meeting are a reminder that it’s also a very imprecise one.
Reflecting that imprecision, the RBA is clearly in wait-and-see mode.
The bluntness of monetary policy is both a strength and a weakness. Jacking up or lowering one key interest rate - in this case, the interbank overnight cash rate - has indiscriminate effects.
It hurts borrowers more than the debt-free, it hurts those losing their jobs more than those still in work, and affects some sectors - like housing - more than others. And when rates fall, the benefits are just as unequally spread.
But that lack of discretion over who gains or loses means the RBA cannot play favourites, setting one rate for some and another for others. So it’s a blunt instrument.
But it’s also imprecise. Cutting interest rates, as the RBA has done by 1.75 percentage points on the past year or so, should be stimulating the economy - encouraging business to borrow to invest and boosting the market for new housing.
It should also be working through the other main transmission channel, by lowering the relative appeal of Australian dollar deposits to foreign investors and eroding support for the currency.
But trying to gauge just how much real stimulus a series of rate cuts will actually give the economy is not easy.
The RBA is in ‘‘wait-and-see’’ mode because it’s waiting to see how much of a push along the rate cuts are giving the economy, and whether those effects are still flowing through.
The RBA clearly expects a more delayed impact to be felt.
‘‘Interest rate sensitive parts of the economy had shown some signs of responding to these lower rates, which were well below their longer-run averages, and further effects could be expected over time,’’ the RBA said in the minutes, released today, of the meeting on February 5.
This was one reason the RBA judged it to be ‘‘prudent’’ to leave the cash rate at three per cent.
But the other transmission channel appears to be blocked, thanks to the Australian bond and money markets’ appeal to foreign investors amid ultra-low yields in other major debt markets.
The terms of trade - the ratio of export prices to import prices - is a well-known driver of the ups and downs of the Australian dollar. So are interest rates.
Both ought to be pulling the rug from under the Aussie dollar right now.
‘‘At the same time, the exchange rate remained high despite the terms of trade having declined significantly since peaking 18 months earlier,’’ the RBA said.
Perhaps it will stay high for many more months, or perhaps not.
Only time will tell whether the RBA has to wield its blunt, imprecise instrument again to help the economy along.
So we will all, like the RBA, just have to wait and see.