From our Bill:
As expected, the RBA Board decided to leave the cash rate unchanged at 2.0%.
In recent statements, its easing bias was expressed with the sentence “continued low inflation may provide scope for easier policy, should that be appropriate to lend support to demand”. This sentence has been moderated to replace the “may” with a “would”. Given that this is the key sentence in the statement, it seems unlikely that changing the key verb would be a fine tuning decision. The word “would” seems stronger than “may”, and therefore we can only conclude that the Bank has somewhat strengthened its easing bias
If the strengthening was signalling an imminent policy change, then other commentary would have changed more significantly. For example, the Board still judged “that there were reasonable prospects for continued growth in the economy” and still noted that “the non-mining parts of the economy strengthened through 2015”.
Certainly the commentary around the labour market was more subdued. In this statement, it noted that labour market conditions improved in 2015 whereas in February, the Board noted that “employment growth picked up and the unemployment rate declined”.
The only other significant change in the statement was around commodity prices which are now described to have “declined very substantially over the past couple of years”. In February, prices were only described as having “declined further”. This is somewhat ironical given that the iron ore price has strengthened from USD40 per tonne to USD47 per tonne since the February meeting.
Commentary around inflation; housing; credit and financial market conditions was unchanged. In particular, the Governor chose not to discuss the recent weak report on capital expenditure expectations released last week.
As with February, the Board concluded by highlighting the need for new information on whether the recent improvement in labour market conditions is continuing and whether the recent financial turbulence portends “weaker global and domestic demand”.
By choosing to strengthen the statement bias, it appears that there is more concern around those issues than was the case in February, partly driven of course by the surprise rise in the unemployment rate from 5.8% to 6.0% in January.
Conclusion
We believe the Board is still some way away from delivering on this easing bias. It has ample time to be convinced, particularly about the labour market and the impact of global financial turmoil. It will also be monitoring developments in the Chinese economy and at the US Federal Reserve.
Our own forecasts around these issues support a steady policy outlook. However, we cannot ignore the decision to strengthen the language around the easing bias.
