So begins a rate cut cycle

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The RBA today signaled the start of an easing cycle, not simply a one off move in the cash rate. The rhetoric that they used was heavily slanted toward the risks associated with the current economic outlook with only a passing glance at the once dominant mining engine. Equally, as you can see in the Wordle pictogram of the statement that inflation is the key theme and trigger, its emphasis illustrating previous importance and its subsidence allowing the concerns for the future to predominate.

Here are the key sentences in the statement. Negatives for growth:

  • Recent information is consistent with a moderation in the pace of global growth,
  • The pace of US economic expansion picked up in the September quarter, but is still only moderate and leaves considerable spare capacity.
  • China’s growth has slowed, as policymakers there had intended.
  • …it is likely to be some time yet before concerns about the European situation can definitively be laid to rest and the effects of the recent turmoil on confidence may result in a period of precautionary behaviour by firms and households.
  • …the terms of trade have now peaked and will decline somewhat in the near term,
  • …cautious behaviour by households and the high exchange rate have had a noticeable dampening effect.
  • The unemployment rate has increased a little over recent months, though it remains close to 5 per cent.
  • Financial conditions have been easing somewhat recently, with market interest rates declining a little and competition to lend increasing. But overall conditions have remained tighter than normal, with borrowing rates still a little higher than average, credit growth subdued and asset prices lower than earlier in the year. The exchange rate has been very variable over the past few months, but on the whole has remained at historically high levels.
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Positives for growth:

  • The terms of trade have now peaked and will decline somewhat in the near term, but they remain very high. ·
  • In response, investment in the resources sector is picking up very strongly, with much more to come. ·
  • Some related service sectors are enjoying better-than-average conditions.

Inflation: 

  • …underlying inflation started to pick up in the first half of the year, recent information suggests the subdued demand conditions and the high exchange rate have contained inflation more recently, notwithstanding continuing sizeable increases in utilities charges  
  • …with labour market conditions now softer, the likelihood of a significant acceleration in labour costs outside the resources and related sectors in the near term has lessened. Accordingly, the Bank’s current judgement is that inflation is likely to be consistent with the 2–3 per cent target in 2012 and 2013, abstracting from the impact of the carbon pricing scheme.

So, all in all, the RBA is more concerned about the prospects for domestic and global growth and less concerned about inflation. That leaves them with a more neutral stance of monetary policy and, in my view, more room for rate cuts in the months ahead. Most likely February next year unless Europe implodes.

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