As many a successful horse trainer knows, stimulus has to be handled carefully lest the horse be cooked or the stewards notice. The RBA has decided it’s time for some “wait and see” as the previously administered dose does its stuff.
The brief statement by governor Glenn Stevens remains decidedly dovish, holding out the promise of more rates cuts should the local economy show evidence of deteriorating from here, but coming down on the side of a pause in administering the monetary juice. Indeed, if he hadn’t given away the punch line in the first sentence, you wouldn’t easily guess the board’s decision to sit pat until the final sentence.
Reserve Bank keeps rates on hold
Can rate policy counter Brexit pain?
Brexit continues to rattle world markets
Markets wracked with post-Brexit anxiety
Japan voices fears after Brexit vote
The deficit kerfuffle
ASX recovers after Brexit volatility
Traders and the Brexit vote
Reserve Bank keeps rates on hold
The RBA has kept its cash rate on hold at 3.25 per cent. BusinessDay's Chris Zappone reports.
The key message is that it takes time for monetary policy to work, so that we are yet to feel the full impact of the cuts already delivered. While waiting to see how the horse performs in due course, the immediate concerns about global growth, especially China, have eased a touch, given the RBA time to weigh the outcome. Says Stevens:
“Over the past year, monetary policy has become more accommodative. Interest rates for borrowers have declined to be clearly below their medium-term averages and savers are facing increased incentives to look for assets with higher returns. While the impact of these changes takes some time to work through the economy, there are signs of easier conditions starting to have some of the expected effects. Business demand for external funding has increased this year, the housing market has strengthened and share prices have risen in line with markets overseas.”
The RBA certainly doesn’t want to overcook its horse and is by nature and remit a stayer rather than a sprinter. Despite the steady chorus from those feeling the pain of restructuring and the prod of vested interest, the fact remains as the RBA states: growth is close to trend.
Aside from the now-given worry about Europe, there is one area of specific concern and another of wariness in the statement: the exchange rate and inflation.
The governor notes that the exchange rate remains higher than might have been expected, but offers no suggestion of being able to do anything about it. (Despite the usual chorus chants, cutting interest rates has done little and another 25 points today would have matched that performance. It’s more about the other parties than Australia, even with lower export prices and weaker global growth.)
On the inflationary front, the latest CPI reading was not unacceptable, but unemployment edging up has a role to play in its management:
“With the labour market having generally softened somewhat in recent months, and unemployment edging higher, conditions should work to contain pressure on labour costs in sectors other than those directly affected by the current strength in resources. This and some continuing improvement in productivity performance will be needed to keep inflation low, since the effects on prices of the earlier exchange rate appreciation are now waning. The bank's assessment remains that inflation will be consistent with the target over the next one to two years.”
The statement provides enough for the monetary doves to claim their predictions of further cuts remain on track – as long as they’re right in predicting the world will become a worse place.
If there is a monetary hawk about, there’s the chance that the horse will prove to have enough juice to stay the “about trend” course as the construction side of the commodities boom peaks. And for those somewhere in the middle, there’s the usual assurance:
“Further effects of actions already taken to ease monetary policy can be expected over time. The Board will continue to monitor those effects, together with information about the various other factors affecting the outlook for growth and inflation. At today's meeting, with prices data slightly higher than expected and recent information on the world economy slightly more positive, the Board judged that the stance of monetary policy was appropriate for the time being.”
And for the RBA watching industry, the good news is that we’ll get much more detail on the bank’s thinking in the quarterly statement on monetary policy this Friday.
Michael Pascoe is a BusinessDay contributing editor