Australia | Aug 04 2009
By Greg Peel
In his July monetary policy statement, RBA chairman Glenn Stevens concluded with:
“The Board’s current view is that the outlook for inflation allows some scope for further easing of monetary policy, if needed. In assessing how it might use that scope, the Board will continue to monitor how economic and financial conditions unfold and how they impinge on prospects for a sustainable recovery in economic activity.”
In April the RBA made its last cash rate cut to 3%. Following ongoing apparent “green shoots” of global economic recovery, the RBA has since decided to keep that rate on hold. It is the lowest cash rate in fifty years after all, and represented the last of a series of cuts all the way from 7.25% in a big hurry.
The RBA constantly reminds us that the effects of monetary policy always take time to flow through, so unless there was another sudden shock to the global financial system a prudent approach would be to let things play out without further intervention.
However, given the disinflationary forces of weak capacity usage and weak labour demand, the RBA did not rule out jumping in with another cut quickly if the situation so warranted. There was “scope for further easing on monetary policy”, if needed. This has been the RBA’s mantra since 3% was reached. Economists had long assumed further easing would be needed, forecasting a consensus low point of 2.5% for the cash rate.
However, with global economic recovery now looking more apparent, economists have begun to believe we may have now seen the low point at 3%. Consensus now has the next monetary policy move being to the tightening side some time soon. And that view would only have been confirmed by Stevens’ statement accompanying today’s August policy decision, which concludes:
“The Board’s judgment is that the present accommodative setting of monetary policy is appropriate given the economy’s circumstances. The Board will continue to monitor how economic and financial conditions unfold and how they impinge on prospects for sustainable growth in economic activity and achieving the inflation target.”
Gone are the words “scope for easing”.
The change of heart can be summed up in an earlier paragraph. In July, Stevens noted “Economic conditions in Australia have to date not been as weak as a few months ago”. Today, he suggested “Economic conditions in Australia have been stronger than expected a few months ago”. And he went on to add:
“This suggests that the risk of a severe contraction in the Australian economy has abated. The most likely outcome in the near term is a period of sluggish output, with consumer spending likely to slow somewhat and investment remaining weak. Stronger dwelling activity and public spending will start to provide more support to overall demand soon, and growth is likely to firm into 2010.”
This is new. Prior to today, Stevens has always tended to be tentative about calling an end to recessionary forces. His carefully worded statements have had more of a downside bias than an upside bias – hence the “scope for easing” constantly suggested. But now Stevens is talking output growth once more, albeit “sluggish”, and has called growth to “firm” in 2010.
Assisting this gentle turnaround in opinion is his opening paragraph. In June the global economy was “tentatively stabilising”. In July it was simply “stabilising”, and today the economy is “stabilising” again but due to “considerable economic stimulus in train around the world”.
We can take today’s statement as the official call of the end of the easing period. This means the next move in rates is up. It is unlikely the RBA will raise the interest rate until it is absolutely sure it needs to do so, and given the board still expects inflation to continue moderating this will not happen for some time, maybe not until 2010.
Were there to be another Lehman-like catastrophe then all bets are off, and we could still see rates in the twos. But for now one is safe to say 3% is the low point.
(Note that today’s retail sales number was weaker than expected, however the RBA does expect “a period of sluggish output, with consumer spending likely to slow somewhat” which is an acknowledgement of the end of government hand-outs. The board does expect the economy to “firm” next year.)