Australia | Oct 04 2011
By Greg Peel
The minutes of the September RBA monetary policy meeting told us that the current setting “left the board well placed to respond to evolving global and domestic economic conditions”. It was the first hint we'd had since last November's rate rise that the RBA was no longer simply holding back on an inevitable rate hike as the European situation and the Australian two-speed economic pressures played out. Were it necessary to cut rates, the RBA was implying, then so it will be done.
No one was expecting the RBA to cut its cash rate today. But what the central bank has provided, comparing this month's policy statement released today from Glenn Stevens with last month's policy statement, is a more definitive declaration that the board is now poised to make a cut if things keep going the way they are.
Last month the board noted conditions in financial markets had been “very unsettled”, and this month it notes conditions “have continued to be very unsettled”, with no prizes for guessing where the biggest problem lies. Last month the board suggested that at that stage, “little evidence is available to gauge the effects of the European and US problems on other regions”. This month the board notes almost apologetically “it will take more time” for evidence to emerge. “Thus far,” says Stevens, “economic conditions are continuing to expand in China and most of Asia”. In September, commodity prices were remaining high. In October, prices have declined, Stevens, acknowledges, “though in general they remain high”.
The RBA would have been well aware of the release earlier today of Australia's trade balance result for August, which showed the second biggest surplus on record. Exports jumped 8%, outstripping a 3% increase in imports. Economists were surprised by the strength of the numbers. In isolation, one might suggest there is no way a central bank could cut rates in the face of such a solid economic position. Even August building approvals jumped by a greater amount than expected.
Yet Australia is not immune from Europe in terms of the impact on global confidence.
In September, the RBA suggested that Australia's near-term growth outlook was looking “somewhat weaker than was expected a few months ago”. Medium-term growth was still likely to be at trend or higher, the board expected, “unless the world economic outlook continues to deteriorate”. This month the board suggests that, “While there remain good reasons to expect solid growth over the medium term, the indications are that the pace of near-term growth is unlikely to be as strong as earlier expected, due to both local and global factors, including the financial turmoil and related effects on business confidence”.
All year the RBA has been worried about a pick-up in domestic inflation. Worried that high commodity prices and Australia's very high terms of trade would flow through to higher wage costs and spark an upward inflationary spiral. The RBA would have put up rates at least once by now on the back of this fear, but for concern over the international situation which, along with the strong Aussie dollar, were providing sufficient restraint. This month however, inflationary concerns are clearly easing:
“Recently revised data show a pick-up to date in the underlying pace of price rises that was less sharp than initially indicated. Moreover, with labour market conditions now a little softer and households more concerned about the possibility of unemployment rising, the likelihood of a significant acceleration in labour costs outside the resources and related sectors is lessening.”
In short, the RBA believes Australia's core inflation may well remain restrained within the 2-3% core target range after all. There is not enough evidence yet to confirm such, and the board will, as always, be keeping a close eye on the data. Were inflation to remain subdued, the RBA would consider that “an improved inflation outlook”, and as such:
“An improved inflation outlook would increase the scope for monetary policy to provide some support to demand, should that prove necessary.”
In other words, the RBA has spent all year in “tell me why I shouldn't raise” mode but now the central bank sounds very much like it's in “tell me why I shouldn't cut” mode. The answer to that question in October is “because confirmation of an improved inflation outlook is required”. Australia's September quarter CPI data is due on October 26. If the numbers are such that the board sees further evidence of an improving inflation outlook, then all punters may be due a prize come Cup Day 2011.
Except, of course, for all those Australians supporting themselves through floating interest rate investments.
Read the full minutes here.
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