Australia | Sep 02 2008
By Greg Peel
The Reserve Bank of Australia today cut its cash rate from 7.25% to 7.00%. This was the first change in the official interest rate since March and the first interest rate cut since December 2001.
It would be wrong to say the RBA has had a sudden change of heart given last month’s statement accompanying no rate change clearly suggested the time was approaching at which tight financial constraints could be eased. The recent RBA Statement on Monetary Policy further heightened expectation, and in the last couple of weeks economists, banks and politicians have been speaking as if the cut had already been announced. There was no comment from the RBA.
It has been the RBA’s solemn task over the years since 2001 to keep a lid on inflation as the Australian economy has boomed. This last year inflation had suddenly become even more of a problem, driven along most specifically by the raging oil price, but supported by the ongoing problems in Australia of limited spare capacity and strong demand growth. To contain inflation, the RBA has been attempting to curb this demand growth, as it notes in the opening of today’s statement.
Yet despite hints at an easing of monetary policy to come, the RBA has also proven resolute in its recent missives, constantly warning of the countervailing force of Australia’s increasing terms of trade and the risk of ongoing wage claims leading to a wage-price spiral. It has also warned that inflation remained a “significant concern”. But this time it’s different – this time the RBA appears to be leaning clearly towards the potential for more easing to come.
The RBA acknowledges in its statement the combination of cash rate rises, additional bank rate rises and tougher credit standards have made financial conditions generally “quite tight”. Such conditions, along with higher fuel costs and lower asset values (that’s a new one) have “exerted the needed restraint on demand”.
Mission accomplished.
The RBA gives the nod to weakening economic conditions such as falling spending and slowing credit growth, as well as acknowledging the weak sentiment evident in recent business and consumer surveys. Yesterday’s poor housing finance data would not have escaped attention. But the Reserve Bank also notes that capacity utilisation is now declining and there are “some signs” of easing in labour market conditions. These last two have been weighing on the Board for many months, so to point to such easing suggests a not insignificant relaxation of RBA concern.
The terms of trade factor has not changed however, and recent current account data support what the RBA has also been warning about for some time – that a strong trade balance is adding “substantially” to the national income and ability to spend. High commodity prices are also providing an upward influence on inflation, the Board notes yet again. However, “it is looking more likely that household demand will remain subdued,” the statement suggests, “and overall economic growth slow in the period ahead”.
It might have said “so we’re not quite so worried about the trade balance anymore”.
Indeed, the RBA still expects inflation to remain high in the short term, “but looking further ahead, the outlook for demand suggests that inflation in both CPI and underlying terms is likely to decline over time, provided wages growth remains contained”.
This is the RBA’s most dovish statement yet. Whereas the scope for a “less restrictive” monetary policy stance was “increasing” last month, this month there is simply “scope for monetary policy to become less restrictive”.
Hence a rate cut. But will there be another one as quickly as next month? The RBA has not put any caveats on this cut. It appears to quite clearly temper its view on the problems of the terms of trade and labour market tightness. However another rate cut as quickly as next month may still be jumping the gun. The statement does still suggest the Board will “continue to assess prospects for demand and inflation over the period ahead, and set monetary policy as needed to bring inflation back to the 2-3 per cent target over time”.
The second quarter CPI will not be known yet by next month. There will most likely be another cut before the year’s out, but inflation is still in the RBA’s sights.
The next question on everyone’s lips is “will all the banks pass on the full cut”. Well we have already been given assurances from the NAB and ANZ, and at precisely 2.34pm today FNArena received a press release from Westpac announcing a full 25 basis point cut in its standard variable mortgage rate.
The banks are working the PR machine.