As expected, the Reserve Bank cut interest rates by 0.25% to a new low of 2.50% yesterday and left us up in the air about whether there might be another one.
The news sent the dollar higher – up to just under 90c, and the stock market ended with a small loss.
And, seeing it was rate cut at the start of the election campaign, the reactions were surprisingly muted after all the silly talk earlier in the day about which party had the lowest rates.
But a close reading of the post meeting statement from Governor Glenn Stevens tells us that the central bank will cut again, if it sees the need to give demand in the domestic economy a bit of a kick along.
"The Board has previously noted that the inflation outlook could provide some scope to ease policy further, should that be required to support demand. At today’s meeting, and taking account of recent information on prices and activity, the Board judged that a further decline in the cash rate was appropriate.
"The Board will continue to assess the outlook and adjust policy as needed to foster sustainable growth in demand and inflation outcomes consistent with the inflation target over time," Mr Stevens said yesterday.
That’s a bit different to the ending of the statement after the July 6 RBA board meeting when Mr Stevens said:
"At today’s meeting the Board judged that the easier financial conditions now in place will contribute to a strengthening of growth over time, consistent with achieving the inflation target. It decided that the stance of monetary policy remained appropriate for the time being. The Board also judged that the inflation outlook, as currently assessed, may provide some scope for further easing, should that be required to support demand."
So what the bank is saying is that if it sees the economy continuing to sag in coming months, then it will cut rates again. That’s despite acknowledging after the July meeting that it had provided a "substantial" amount of monetary policy stimulus to the economy already.
RBA cuts rates to record low
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Judging by recent data, including some out Monday and yesterday, the economy continues to drift.
Certainly there is no sign of really sustainable growth happening as some sectors stumble along, such as retailing and others show some strength, such as exports, which recorded a trade surplus for the 5th month in a row in June.
Australia’s trade surplus was $602 million in June, compared to a surplus of $507 million in May, according to the Australian Bureau of Statistics. During the month, exports fell 1% and imports fell 2%.
Retail sales were flat in June and job ads in July in newspapers and on the internet were weak (but showing some signs of a steadying after five months of falls).
House prices rose in the June quarter by around 2.4% in the major capital cities, the strongest yearly rise for three years. Housing finance data out today will flesh out what’s happening in housing after those falls in approvals in June.
Banks were quick to pass on the rate cut yesterday – the CBA, the NAB and the Bank of Queensland cut their home loans by 0.25%.
Westpac went one better, cutting its rate by 0.28%, raising the question why it hadn’t cut earlier, before yesterday’s official reduction.
In yesterday’s statement, Mr Stevens said that, "In Australia, the economy has been growing a bit below trend over the past year.
"This is expected to continue in the near term as the economy adjusts to lower levels of mining investment. The unemployment rate has edged higher. Recent data confirm that inflation has been consistent with the medium-term target. With growth in labour costs moderating, this is expected to remain the case over the next one to two years, even with the effects of the recent depreciation of the exchange rate.
"The easing in monetary policy over the past 18 months has supported interest-sensitive spending and asset values, and further effects can be expected over time. The pace of borrowing has remained relatively subdued, though recently there are signs of increased demand for finance by households.
"The Australian dollar has depreciated by around 15 per cent since early April, although it remains at a high level. It is possible that the exchange rate will depreciate further over time, which would help to foster a rebalancing of growth in the economy."
More information on its view about the outlook for the economy will come on Friday when the central bank releases its third Statement of Monetary Policy for this year.
