- The RBA cut the cash rate by 25bpts to 4¼% at its December Board meeting.
- There was no particular rates “guidance” in today’s Statement (which was largely a carbon copy of last month).
- While the European story is evolving every RBA meeting should be regarded as “live”.
Some revisions to the inflation profile – history and forecast – opened the door for rate cuts. And the downside risks posed by European developments saw the RBA deliver cuts in November and December. The cash rate now stands 50bpts lower than the recent peak of 4.75%.
The general perception is that recent RBA rate decisions have been close calls. The case for a rate rise was discussed in August – but rates were left unchanged. The case for no change was discussed in November – but rates were cut. And there is a flavour of that in today’s decision as well. Commentary about domestic economic conditions is positive with output growth seen as “close to trend” and demand growth “stronger than that”.
There was no particular rates “guidance” in today’s Statement (which was largely a carbon copy of last month). There is a hint that policy makers have revised down global growth expectations again and a hint of greater concern about financial contagion flowing through to Australian markets. Recurring themes are the idea that household sentiment has shifted in a way that favours less wage inflation and asset prices have shifted in a way that favours household caution. The former theme is part of the case for lower rates and the latter highlights the “insurance” aspect of the rate cuts.
Policy makers are caught between a domestic economy that is in reasonable shape and the risks posed by any European financial meltdown and recession. The balance of these risks argued for a shift away from the slightly restrictive policy settings of earlier in 2011. A range of approaches suggest that a cash rate of 4½% is “neutral” in the current environment. So at 4¼% we now have slightly accommodative policy settings.
QIII GDP data to be released tomorrow should show an economy travelling at an annualised pace of 4% over the past six months, a significant improvement on the flat outcome recorded over the previous six months. So further rate moves will depend on how the European story evolves. While that story is evolving every RBA meeting should be regarded as “live”.
The GDP data will also confirm that the terms‑of‑trade hit a 140‑year high in QIII and that the mining capex boom rolls on. The accompanying stimulus is hitting an economy that on some measures is close to full capacity. Inflation may be a non‑issue in the near term. But upside inflation risks remain over the medium term. RBA forecasts showing underlying inflation picking up into the upper half of the 2‑3% target range at the end of 2013 reflect these risks and argue against aggressive rate cuts.
The other domestic issue relates to the household sector. The national accounts should show that households are a bit more focused on savings and paying off debt and a bit more cautious about spending. Policy makers have spent a fair amount of time getting households to this point to make room for the mining boom to roll through. They are unlikely to want to jeopardise these changes by overstimulating the household sector.
For these reasons we expect only limited action from here. We have a 25bpt cut to 4% pencilled in for February.
A genuine European implosion would, of course, outweigh these domestic considerations in the policy debate. And the monetary authorities would no doubt push rates quickly into more stimulatory territory.
The above information is courtesy of CBA Global Markets Research
0 Comments
Leave a Reply. |
Archives
October 2022
Categories |