Australia | Apr 07 2009
By Greg Peel
In his March statement, RBA governor Glenn Stevens noted that “the Board judged that the stance of monetary policy was appropriate for the moment,” and “The board will consider its position again at its next meeting”. On that basis there was no change to the rate cut.
While the Board was prepared to “consider its position again” in April, rather than suggest 3.25% would remain the case for a while, we later learned from the minutes of the meeting that the board was actually split 2-3 on whether to cut or not. The trade-off was to “remain flexible”. One assumes, therefore, that any further deterioration in the data over the last month was likely to at least change the mind of one swing voter.
The data has not exactly been positive over the last month. While economist forecasts were split about 45% no cut to 45% 50 point cut for April, around 10% said a 25 point cut was a chance. The argument against such a small cut – after a series of 75 and 100 point cuts – is that the banks were unlikley to pass much if any of it on into mortgage rates. However, my hunch is that 25 points was simply the compromise reached between the stayers and the cutters of the board.
This is reinforced by comparing the final paragraph of March’s statement to April’s. In March Glenn Stevens said:
“In response to that outlook, there has already been a major change in both monetary and fiscal policy. Market and mortgage rates are at very low levels by historical standards and business loan rates are below recent averages, reducing debt-servicing burdens considerably. Together with the substantial fiscal initiatives, the cumulative decline in interest rates will provide significant support to domestic demand over the period ahead. On this basis, notwithstanding evident economic weakness at present, the Board judged that the stance of monetary policy was appropriate for the moment. The Board will consider the position again at its next meeting.”
And today he said:
“There has already been a major change in both monetary and fiscal policy inAustralia. Market and mortgage rates are at very low levels by historical standards and business loan rates are below recent averages, reducing debt‑servicing burdens considerably. Nonetheless, the Board judged that there was scope for a further modest adjustment to the cash rate. The stance of monetary policy, together with the substantial fiscal initiatives, will provide significant support to domestic demand over the period ahead.”
Almost identical, but for the sentences I have underlined.
Interestingly, one difference is that last month the board was ready to reconsider its position again but this month no such statement has been made. Are we thus to assume there is already no intention of cutting rates in May?
Beyond the last paragraph, the previous three paragraphs of their statement in April are very similar to March.
Last month Asia and Eastern Europe were in trouble. This month Eastern Europe’s dropped off the radar but China leads “tentative signs of stabilisation in several countries”. It’s too early to tell however, says Stevens.
Last month the world was stabilising bank balance sheets with stimulus measures, this month the specific US measures came in for special mention.
Last month, “In Australia, demand has not weakened as much as in other countries,” and “the Australian economy has not experienced the sort of large contraction seen elsewhere”. This month, “The Australian economy is contracting, though by less than those of its trading partners”.
That last one is a subtle difference also, but perhaps enough to tip the scales slightly to, say, just a 25 point cut?
I’d be looking out to June now for the next change in policy. We have Kev’s cheques now arriving, and Harvey Norman hanging the bunting for its May run-out. The RBA will no doubt like to get at least some idea of how that progresses.