Australia | Jun 16 2009
By Greg Peel
The Reserve Bank of Australia today released the minutes of its last monetary policy meeting, held earlier this month. Following the meeting the board left its cash rate on hold at 3% for the second consecutive month.
Last month economists were largely split as to whether the RBA would cut from 3% or hold steady. This month few expected a cut, although most are still looking at 2.75% or 2.5% as the bottom of the easing cycle in the months ahead. The minutes of this month’s meeting do nothing to suggest this view is unwarranted.
Last month the reason for the RBA not to cut could be best summed up by the improvement in stock and credit markets. Stock markets provide a forward indicator of economic growth and the “green shoots” of March had continued to drive strength into April. Credit is the oil to the wheels of economic activity, and globally credit spreads had fallen back to levels not far from where they had been before Lehman Bros went under. This month the board noted the stock market rally had stalled somewhat in May, but was nevertheless resilient and had successfully absorbed a significant level of fresh capital raisings. Credit spreads had, however, continued to fall, even to levels below pre-Lehman.
The board noted that the March quarter had seen further falls in GDP for developed countries, but that a small number of countries, particularly in east Asia, had experienced growth. On that basis, the board suggested global GDP will not be as weak in coming quarters as it was in December and March. While even Japan looked a bit healthier in the March quarter, clearly it was China leading the field. China enjoyed a strong recovery in industrial production and very large increases in fixed capital investment by the public sector, as well as strong credit growth, the board noted.
The RBA remains optimistic about China, but suggested in the meeting “uncertainty about the durability of China’s economic recovery inevitably remained”.
The RBA also turned its international focus to rising national debt, suggesting such a build-up will provide “a significant challenge” for some countries. All up global growth was expected to be below trend for some time, and spare capacity and unemployment were expected to rise further. The process of adjusting balance sheets, both at the business and household level, was “weighing on many economies”.
On the domestic front, the RBA noted an “unusually large” difference in the March quarter between increased expenditure and decreased production, with a “very strong” contribution from exports, including wheat. The board noted exports to China had increased as a proportion of the total from 5% in the 1990s to 20% today. Australia had benefited from Chinese demand for iron ore and coking coal when other sources of demand had declined.
Clearly the RBA ‘s aforementioned uncertainty on China above extrapolates to a cautious view on Australia’s resultant fortunes.
The board noted retail sales locally were boosted by government stimulus in May, but that would drop off in June. Stimulus was also assisting the housing market, but business investment recorded a large decline in the March quarter. The board did not expect business investment to fall to “unusually low levels” however, due to high levels of investment in the mining sector.
To sum up, the board noted:
“The latest information was consistent with the tentative assessments at the preceding meeting that the global economy was stabilising after two very weak quarters. Conditions in international financial markets had continued to improve, though sentiment remained fragile. Members judged that the most likely outcome over the next year or two would be subdued global growth overall, as households and financial institutions in many major countries would be repairing balance sheets for some time.”
But on the local front:
“InAustralia, the economy was experiencing a downturn but, on the information available so far, this would be less severe than in most other countries. Here too the outlook was for a fairly gradual expansion getting under way later in the year, with spare capacity tending to increase and inflation tending to decline. Recent information had not led to any downward revision to the outlook; if anything, some indicators had been on the stronger side.”
And that is why the RBA remained on hold. In terms of future decisions, the board reiterated that government stimulus was supporting demand, and that the full effects of monetary easing (from 7.25% in March 08 to 3.00% in April 09) “would take time yet to be seen”. Hence the board did not see a “pressing case” for another rate cut this month.
But that does not preclude another cut down the track:
“[The board] viewed the inflation outlook as affording scope for some further easing of monetary policy, if that were to be needed to support demand at a later stage. Accordingly, members judged that maintaining the current stance of monetary policy for the time being would be consistent with fostering sustainable growth and low inflation, and would leave adequate flexibility to respond to developments as needed over the period ahead.”
In other words, “we will not hesitate to cut again if we have to, but we do not wish to be rash”.