Last year we have terrific time analysing the RBA’s quarterly Statement on Monetary Policy as its medium term framework for an ongoing mining boom seemed constantly out of date with an economic reality that juddered in the opposite direction. That has caught up with the RBA once more and they have again lowered their projected growth rates for underlying inflation to 2.25 per cent for the year to the end of June, 0.25 basis points lower than it forecast three months ago. For growth they’ve lowered forecasts to 3.5 per cent from 4.0 per cent.
That’s all fair enough I suppose and there is further evidence of the RBA playing catch-up in the framing of this SoMP with much more circumspection about our economic prospects than last year, as much based upon domestic conditions as international.
Assuredly, the mining boom still takes centre stage:
The very strong growth in investment in the resources sector remains a key element in the forecasts. This investment is expected to have positive spin-offs to a number of other sectors, although the high exchange rate, fiscal consolidation and subdued consumer spending on goods mean that overall growth outside the resources sector is expected to remain below trend.
However note that even here the attention paid to the downside sectors. And it’s the doubts about whether the inflating sectors or deflating sectors are going to win out that define this SoMP. There’s Europe to worry about as usual but it’s the risks in the local scene where the RBA has really changed its tune:
In terms of domestic factors, it remains difficult to judge the net impact on the economy of, on the one hand, a once-in-a-century investment boom in the resources sector and, on the other, a high real exchange rate. With the exchange rate having been at a high level for some time, a number of businesses are reassessing their business models and mediumterm prospects. Other businesses are benefiting from the boom in the resources sector and from the lift in national income from the high terms of trade. Given the historically unusual nature of these events, there is, inevitably, considerable uncertainty about how these factors will ultimately play out, with plausible upside and downside scenarios for domestic growth.
So the RBA basically stands ready to move either way:
With the inflation outlook having improved late last year, the Board lowered the cash rate by a cumulative 50 basis points at its November and December meetings, after having maintained a mildly restrictive stance of monetary policy through most of 2011. These reductions in official interest rates were largely passed through to borrowers, so that most lending rates in the economy are now close to their mediumterm averages. At its February meeting, the Board judged that it was appropriate, for the moment, to hold the cash rate steady at 4.25 per cent, given that the central forecast was for close to trend growth in GDP and inflation being close to target. The current inflation outlook would, however, provide scope for easier monetary policy should demand conditions weaken materially. Over the months ahead, the Board will continue to monitor information on economic and financial conditions and adjust the cash rate as necessary to foster sustainable growth and low inflation.
Oddly enough, last year we had hawkish SoMPs and dovish meetings. Now we have the reverse.
