■ The RBA left the cash rate unchanged at 3¼% at the November Board meeting.
■ There is a better tone to the economic data but a high side QIII CPI seems to have been the main impediment to a cut.
■ The door to further rate cuts is still open but policy makers will want to see the next CPI readings before committing.
■ The February Board meeting looks to be the next “live” meeting for possible policy action.
■ We expect a 25bpt cut in February, taking the cash rate to 3% and marking the likely low point for this cycle.
Financial markets and economic commentators were in broad agreement that today’s interest‑rate decision was too close to call. In the event, the RBA has climbed down on the side of the fence that favoured no change. The cash rate remains at 3¼, just above the 2009 lows.
The issues that were causing some concern for policy makers and formed the rationale for the October rate cut now look a little less threatening. The RBA notes that, outside of Europe, global growth risks are “more balanced”. Commodity price trends are now “more mixed” rather than falling. And the Australian economy is “running close to trend” with earlier policy stimulus slowly taking effect.
The main impediment to lower rates, however, appears to have been the QIII CPI readings that were “slightly higher than expected”. So the message from the RBA’s decision to remain on the sidelines this month is that inflation trends have become a little worrying. And the Bank will presumably want to wait for the next round of price readings in late January before deciding whether further rate stimulus is appropriate. The February Board meeting looks to be the next “live” meeting for policy action.
The door to further rate cuts is still firmly ajar with the need to find alternative sources of growth once the resources construction boom peaks in 2013 an emerging theme in RBA commentary. Today’s Statement explicitly notes that “as this peak approaches, the Board will be monitoring the strength of other components of demand”. So the contractionary stance of fiscal policy is an issue for policy makers. And the high AUD is still an important input into the policy debate. But the Aussie dollar is now a more complex story – the inflation restraint imposed by a rising currency is now “waning” even as the currency “remains higher than might have been expected.
More fundamentally, the policy task from here can be seen as juggling two competing objectives. These are ongoing global risks and desire to transition the economy to a more non‑mining focus lined up against the standard inflation concerns and a desire to encourage the household focus on balance sheet repair.
The “cycle” will always win when it comes to deciding to shift the policy levers or not. The contractionary stance of fiscal policy means that monetary policy has to do more of the heavy lifting. So the risks still lie with lower rates beyond today. But that policy skew needs a benign inflation backdrop to work properly. So the bar to further rate cuts in 2013 is lifting.
Focus now turns to the quarterly Statement on Monetary Policy on Friday. We expect that Statement to incorporate some modest downward revisions to growth projections with little impact on current inflation forecasts.
The above articel is courtesy of CBA Economics Department