■ With rates now well into stimulatory territory ( i.e. now at the 2009 emergency lows in the immediate wake of the GFC), we think we are nearing, or at the low point, for the current easing cycle.
■ Although, further modest policy easing cannot be ruled out in early 2013 if the QIV CPI (due January) is benign and the economy shows further softening in the months ahead.
■ The RBA noted that recent data “confirm that the terms of trade have declined by about 15% since the peak” and “the peak in resource investment is approaching”. In cutting rates the Bank sees room for the non‑mining economy (e.g. housing) to gain momentum sooner to offset moderating growth from mining investment.
In moving to cut rates again in December the RBA noted that the move should “help to foster sustainable growth in demand and inflation outcomes consistent with the inflation target”. The RBA seems much more comfortable with the international outlook than it did in early 2012, but does note that risks are still skewed to the downside mainly due to the European sovereign debt crisis. The central bank sees the US economy recording moderate growth “though uncertainty over the course of US fiscal policy is weighing on sentiment”, and believes China’s growth has “stabilised”.
The main impediment to lower rates at the RBA’s previous Board meeting in November appeared to have been the QIII CPI readings that were “slightly higher than expected”. But today’s statement reveals that the monetary authorities worries about inflation have dissipated somewhat in recent weeks, paving the way for a pre‑Christmas, pre‑QIV CPI rate cut in December.
Indeed, today’s statement says that “inflation is consistent with the medium ‑term target, with underlying measures at around 2½%”. It also notes the introduction of the carbon tax affected consumer prices in QIII, but that there would only be “some further small effects over the next couple of quarters”. The RBA also seems unfazed by wages growth as a possible source of medium term inflation pressures. It says that “with the labour market softening somewhat and unemployment edging higher, conditions are working to contain pressure on labour costs”.
In moving to cut rates again today, the RBA board said that while growth has been running close to trend over the past year, led by large resources sector capital investment, recent numbers confirm “that the peak in resources investment is “approaching” and that other areas of demand would need to strengthen down the line.
On this score, the RBA does not see private consumption spending returning to the “very strong growth of some years ago”, and that the “near term outlook for non‑residential building investment and non‑mining investment generally remains relatively subdued”. The Board also notes the significant drag on growth from the current Commonwealth and State fiscal tightening. On a brighter note, the RBA sees a “prospective improvement in dwelling investment, with dwelling prices moving a little higher, rental yields increasing and building approvals having turned up”.
The bottom line of the above ruminations is that, against the background of: downside risks to global growth emanating from Europe; the medium term inflation outlook looking benign still; and with the peak in the resources investment boom on the horizon; the RBA felt it was appropriate to try to help boost activity in current subdued areas of the non‑mining economy to ultimately take over some of the heavy lifting from the mining sector in terms of future local economic growth.
The above article is courtesy of the CBA economics department