There's an important comment missing from the Reserve Bank governor's brief statement, as appropriate in the week before the federal budget: the explicit nailing of Canberra's surplus fixation as a key reason for the RBA having to move into stimulus mode.
We're not in the zone of Wayne Swan's next budget “providing room” for the RBA to lower rates; the extent of fiscal drag, taking about 2.5 percentage points off GDP as Labor with Liberal urging rushes back into surplus, is forcing the RBA to cut and cut sharpishly.
There's a hint there between the lines and there should be more in the quarterly statement on monetary policy on Friday. The immediate key is that the governor specifies the RBA is cutting “to support demand” – not because output growth “was somewhat below trend”.
And the need to “support demand” is “notwithstanding that growth in domestic demand ran at its fastest pace in four years”.
It's the RBA's job to look forward in setting monetary policy, not to be a captive of the last quarter's performance in those sectors of the economy that are flat. Thus the unspoken importance of next week's budget and its promise to be a drag on domestic demand.
The December meeting's 25 point trimming of the cash rate moved monetary policy to the bottom end of neutral. The banks' movements since then have eroded that position slightly, so some of today's 50 point move is designed to make up for that and perhaps a little more that will be retained from this round. But that still leaves a 30-point-or-so move into the stimulus zone, to get borrowing rates where the RBA wants them.
And what happens next remains completely open-ended with no hint in the governor's final par whether the board is of a mind to cut further, sit pat or raise at the next meeting – but there's no problem ruling out the last option.
The interaction of monetary and fiscal policy has reached a most interesting phase. We're used to the idea of our central bank having to act as a brake on the spending tendencies of politicians, but now we have the central bank putting a big toe on the accelerator to counter the government's braking.
The individuals and lobby groups who have been calling for a 50 point cut now get to find out just how blunt and slow an instrument monetary policy tends to be. The fiscal brake we've been promised may yet prove to take quicker effect than the monetary accelerator.
The stimulation is made possible by inflation being low, but low inflation isn't causing it. The RBA continues to forecast that its core inflation measures will remain within its two-to-three per cent target zone, not commenting on that core measure over past two quarters annualises at 1.8 per cent. The RBA board meetings will continue to be very interesting indeed.
Michael Pascoe is a BusinessDay contributing editor.