The chances of another rate cut are receding and one will only occur if there’s a collapse in Chinese demand for our minerals or the US economy hits the wall and slumps into a recession which paralyses global financial markets (a repeat of 2008) and threatens to deliver a body blow to the Australian economy.
This realisation saw the dollar rise half a cent in local trading yesterday after the release of the minutes of the Reserve Bank’s July 2 board meeting which left the cash rate steady on 2.75%. The local stock market dipped into the red, then rose after the release of the minutes, then fell again.
Such big events offshore (especially in China) would knock our economy badly, forcing the RBA to cut rates to cushion the economy against the impact.
In fact there was one word in the statement’s final paragraph, where the board sets out the thinking on the current stance of monetary policy and prospects for a change – that word was "substantial" as in (my emphasis):
"Given the exchange rate adjustment that was occurring, and with the substantial degree of monetary stimulus already in place, members assessed the current stance of policy to be appropriate for the time being. The Board also judged that the inflation outlook, although slightly higher because of the exchange rate depreciation, could still provide some scope for further easing, should that be required to support demand."
The word substantial was omitted from the post July 2 meeting statement from Governor Glenn Stevens. It might sound a small thing, but the RBA (like all other central banks) chooses its language carefully – rate cuts of 2% from late 2011 are certainly a ‘substantial‘ easing of monetary policy, especially when you take the 12% fall in the value of the dollar from its recent highs.
Rate cut hopes dampened by RBA minutes
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Further, another comment in the minutes adds to the impression that the bank thinks the economy has had all the stimulus it needs, baring a one-off shock from offshore. And note the reference to the "inflation outlook, although slightly higher because of the exchange rate depreciation".
That’s the RBA looking ahead and seeing the likes of higher oil and petrol prices and other import costs feeding through to the CPI in the June quarter report (to be released on July 24) and later in the year.
"The effects of lower interest rates were apparent across a range of indicators and, given the lags involved in the transmission of monetary policy, this process had further to run. The effects to date were most evident in the housing market and were expected to be apparent in further growth in dwelling investment," the RBA said.
In other words, the bank is still waiting for more definite signs the rate cuts are lifting the domestic economy from its current sub-trend level of activity. But it sees it happening in the housing sector (as we pointed out last week).
And then there’s the bank’s summary of the state of the economy:
"Overall economic activity in Australia’s major trading partners appeared to have been growing at close to its long-run average over recent months, and while commodity prices continued to decline, they were little changed in Australian dollar terms over the past two months because of the exchange rate depreciation.
"Recent data suggested that domestic economic activity continued to grow at a below trend pace. The outlook for both mining and non-mining business investment remained uncertain.
"Mining investment was likely to remain high for some quarters given the considerable volume of firmly committed work, even though it looked to be close to, if not past, its peak.
"At some time beyond that, however, mining investment was expected to decline more rapidly, partly reflecting a significant decline in the planning and development work that is a precondition for new projects. Resources exports were expanding at a strong rate and this was expected to continue as projects currently under construction began production.
"The outlook for investment in the non-mining business sector remained for moderate growth, but near-term indicators for investment were still somewhat subdued.
"The news in recent months had generally been consistent with the outlook for growth being a little below trend and inflation remaining consistent with the medium-term target. The most significant change had been the depreciation of the exchange rate, though members noted that it remained at a high level.
"The depreciation was expected to add a little to inflation over time, but the forecast was for inflation to remain consistent with the target. Members noted that it was possible that the exchange rate would depreciate further over time as the terms of trade and mining investment declined, which would help to foster a rebalancing of growth in the economy."
So no more rate cuts, unless there’s a big crisis somewhere that directly threatens Australia, or the domestic economy takes an enormous hit from some totally unforeseen domestic event.
