The RBA’s monetary policy board met earlier today, and as we predicted, decided to leave the cash rate unchanged at 2.75%. As yet we cannot go into too much detail on their decision, as the full minutes of the meeting are not released for another two weeks. However, we do have the statement by Governor Glenn Stevens.

Just about everything the Governor said is to be expected, he mentions some recent volatility in financial markets overseas, some changing bond market conditions internationally, and the fact that revisions to growth estimates for the first half of the year show slightly below trend growth. The Governor notes that borrowing has been somewhat subdued, and that the unemployment rate has edged up slightly. None of these problems are particularly dire, in particular the slightly below-trend growth associated with the slowdown in mining investment is typical of such a large structural change.

Tellingly, the Governor mentions that “inflation has been consistent with the medium-term target and is expected to remain so over the next one to two years,” and that such a forecast for inflation “may provide some scope for further easing, should that be required to support demand.” While the Governor mentioned that this must be considered in the context of the depreciating dollar, such statements are a clear sign that the bank still hasn’t exited the easing cycle.

It is my intuition that the natural rate may be slightly above 2.75%, in line with the historical average (notwithstanding the long-run secular decline in interest rates globally over the last two decades). If this is the case, we can expect a steady return to trend growth as the structural shift away from mining investment is completed, and future rate movements may become more difficult to predict because the “inflection point” where the bank shifts from an easing cycle to a tightening cycle is often the hardest to pick. If I am wrong, (which I often am, particularly about the future), then further cuts are in order.

At any rate, we live in interesting times! More when the minutes come out.

The Governor’s speech is available here.

Ben Jackman

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