Australia | Oct 02 2012
By Greg Peel
At today's monetary policy meeting the board decided to cut the RBA overnight cash rate by 25 basis points to 3.25%, having last cut to 3.50% in June. To assess why the central bank made its decision its best to compare today's accompanying statement with the equivalent statement from last month.
Today RBA governor Glenn Stevens noted that estimates for global GDP are being “edged down,” while last month he noted assessments that global GDP will grow no more than average pace. Last month Chinese growth was considered to be “reasonably robust” albeit below the pace of previous years, whereas this month “Growth in China has slowed, and uncertainty about near-term prospects is greater than it was some months ago”.
Last month the RBA acknowledged some commodity prices had “fallen sharply” and that the terms of trade had peaked and declined, albeit to a level that is still historically high. This month it was acknowledged key commodity prices remain significantly lower despite a bit of a bounce recently (ie iron ore), but Stevens specifically noted the terms of trade are down 10% from last year's peak and will probably decline further, though they will “remain historically high”.
Last month the RBA made no mention of the Australian housing market, but this month: “Investment in dwellings has remained subdued, though there have been some tentative signs of improvement, while non-residential building investment has also remained weak”.
This month and last, “very large increases in capital spending in the resources sector” were noted. However this month it was also suggested that: “Looking ahead, the peak in resource investment is likely to occur next year, and may be at a lower level than earlier expected. As this peak approaches it will be important that the forecast strengthening in some other components of demand starts to occur.”
Last month it was suggested that the labour market was showing “moderate growth,” and while this month saw a reiteration, the observation was added that: “The Bank's assessment, though, is that the labour market has generally softened somewhat in recent months”. And with regard to inflation, “Moderate labour market conditions should work to contain pressure on labour costs in sectors other than those directly affected by the current strength in resources”.
Last month Stevens suggested the impact of earlier rate cuts were “still working their way through the economy”. This month there are “tentative signs of [those cuts] starting to have some of the expected effects,” although it will still take some time.
And the conclusion this month:
“At today's meeting, the Board judged that, on the back of international developments, the growth outlook for next year looked a little weaker, while inflation was expected to be consistent with the target. The Board therefore decided that it was appropriate for the stance of monetary policy to be a little more accommodative.”
Given nothing much has changed in recent months with regard to European and US economic performance, those “international developments” are clearly a reference to slower China, which has affected lower commodity prices and a lower terms of trade, which has in turn brought into focus the approaching peak in resource sector capex. However references to the domestic housing and labour markets make it clear the lack of domestic strength outside resources provided scope for this “international” rate cut by offering little prospect of higher inflation.
But what of the Aussie, which is what everyone assumed would be the impetus for any RBA shift?
Well last month the RBA said: “The exchange rate has declined over the past month or two, though it has remained higher than might have been expected, given the observed decline in export prices and the weaker global outlook”.
And this month the RBA said: “However credit growth has softened of late and the exchange rate has remained higher than might have been expected, given the observed decline in export prices and the weaker global outlook”.
Can't pick any obvious reference to the exchange rate being the determinant of a rate cut in this comparison.
So there we have it. Now we can all look forward to both Swan and Hockey carrying on like geese as they rant and rave about how the banks better pass on all of the cuts to mortgage holders or…or…or..or we'll rant and rave some more. Meanwhile, retirees relying on fixed income have been hit with another slug to the pocket. Swan and Hockey couldn't care one iota, unless of course you moved to a swinging seat.
Read the full statement here.
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