Australia | Nov 01 2011
By Greg Peel
The RBA has not waited around to see the final detail of the European resolution plan, probably figuring that a weak response from global markets would warrant a cut anyway. “European governments are making progress,” the central bank notes in its statement accompanying today's monetary policy decision, and “equity markets have gained ground and the Australian dollar has risen significantly as risk aversion has lessened”.
That Aussie dollar was probably also a clincher in the RBA's decision to cut its cash rate by 25 points today to 4.50% given the central bank acknowledges a strong Aussie as a de facto rate rise. And while the RBA has been telling us for months and months that Australia's terms of trade are extremely high, this month the suggestion is “The terms of trade have now peaked and will decline somewhat in the near term”.
In October the RBA suggested “the pace of near-term [Australian economic] growth is unlikely to be as strong as earlier expected”. This month “Information about the Australian economy suggests modest growth overall”.
However, at the end of the day that weak September quarter core inflation number was the real clincher. In October the RBA was “weighing the question” of whether weaker conditions in Australia, compared to earlier in the year, would “contain” the expected pick-up in inflation. This month the central bank believes “subdued demand and the high exchange rate have contained inflation more recently”. In October the suggestion was “inflation may now be more consistent with the RBA's 2-3% target in 2012 and 2013” while this month “inflation is likely to be consistent with the 2-3% target in 2012 and 2013” [my emphasis].
The RBA's decision to cut may yet have fallen at the final turn, given the board notes that financial conditions have been easing, market interest rates have declined a little and competition for lending has picked up pace. This may have allowed the central bank to assume a “market rate cut” and thus remain on hold to provide the balance. However, “overall conditions have remained tighter than normal, with borrowing rates still a little higher than average, credit growth subdued and asset prices lower than earlier in the year”. And despite volatility the Aussie has remained stronger rather than weaker.
All year the RBA has cited its concern about inflation pressures in maintaining its “mildly restrictive” monetary policy stance. That concern has now eased, meaning the RBA can feel more comfortable in recognising that part of Australia's economy not related to mining and the difficulties it's been having. With inflation no longer an apparent threat, the central bank has seen good enough reason to bring monetary policy back to “a more neutral stance”.
Everyone with a mortgage, perhaps looking to sell a house, or anyone involved in retail or any other consumer-sensitive industry is a winner on Cup Day 2011. All those who have their retirement funds, super or savings in cash positions at present – and there's a lot of them – will not be popping any corks.
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