■ Policy settings are accommodative and now is the time to assess the impact.
■ The main pressure for lower rates comes from global risks – we retain a rate cut in our forecast profile for November partly as a reflection of those risks.
A theme in recent RBA commentary is that a lot of policy stimulus has been applied since late 2011 and now is the time to see what impact that stimulus is having. That theme was evident in today’s post meeting Statement with the Bank noting “monetary policy is easier than it was for most of 2011” and “it is too soon to see the full impact of those changes”.
The cash rate, at 3½%, is at the lowest level since late 2009 and 125bpts below the most recent peak of 4¾%. Policy settings are now comfortably into stimulatory territory on our calculations.
Attention will now turn to the quarterly Statement on Monetary Policy (SMP) on Friday for any future rates guidance.
The QII inflation readings were in line with RBA forecasts published in May. Those forecasts projected that underlying inflation (exc carbon price) would remain around 2% over the balance of 2012 and within the 2‑3% band in 2013. These numbers are unlikely to require much revision based on QII CPI outcomes. The RBA indicated in today’s Statement that its assessment of the inflation outlook is “unchanged” in the sense that it still expects inflation to run in the target range over the next couple of years.
There is greater scope for revisions to economic growth forecasts. Any revisions should be upwards. The QI GDP figures were much stronger than the outcome implicit in RBA forecasts. And history was revised up. The indications are that strong retail spending and rising net exports will underpin a solid QII outcome as well. Allowing for these base effects would boost GDP growth in 2012/13 to about 3¾%, or above the 3‑3½% forecast range published by the RBA in May.
The run of recent domestic data is seen by the RBA as indicative of an economy running at “close to trend overall”.
RBA Governor Stevens has characterised the economic glass as “half full”. And certainly there is plenty of support in the domestic data for that view. Households have responded to policy stimulus. Retail spending volumes are growing at an above‑trend pace and building approvals have bounced back to “normal” levels. The mining capex boom rolls on. Jobs growth has slowed but unemployment remains near full‑employment levels. Commodity prices have dropped but remain very high on any reasonable timeframe. House prices appear to have stabilised.
But policy makers still see downside risks. And there are plenty of those emanating from Europe. Today’s Statement reiterates earlier concerns that “Europe will remain a potential source of adverse shocks for some time”. Global growth will run at trend at best in 2012.
Today’s Statement also hints at some underlying concerns about the impact of a high Aussie dollar. The Bank has indicated a couple of times now that the Aussie remains “high” despite falls in the terms‑of‑trade and a weaker global economy.
The main pressure for lower rates reflects global risks – either directly through slower growth and financial market volatility or indirectly through lower commodity prices and a falling terms‑of‑trade. We retain a rate cut in our forecast profile for November partly as a reflection of those risks.
The above article is courtesy of CBA economics department