It wasn’t only official rates that the Reserve Bank left unchanged today. Its reasons for inaction were eerily similar to the views of the global and Australian economies it expressed last month. However, there was one potentially telling shift in the language the bank used.
In May it saw signs of stabilisation in some countries. Now evidence is continuing to emerge that the global economy is stabilising.
Back then it believed the economic stimulus in most countries would contain the downturn and support an eventual recovery; today it still believes exactly that.
Last month it said the Chinese economy in particular was picking up speed; now the turnaround is clearest in China.
A month ago the Australian economy was still contracting. It still is, with more to go. But borrowing for housing was, and still is, picking up while business borrowing was, and is, declining as companies curtail investment plans and seek to reduce leverage.
Monetary policy, it said again, has been eased significantly, with market and mortgage rates at very low levels by historical standards and business loan rates below average. Much of the effect of the changes had yet to be observed last month and still has yet to be observed.
The one potentially significant departure from last month’s script, albeit a rather subtle one, was Glenn Stevens’ statement that the prospect of inflation declining over the medium term suggested that scope remained for some further easing of monetary policy.
In May, the board was going to continue to monitor economic and financial conditions in assessing whether further reductions were required. Today, there is scope for more rate cuts.
The signal that there could be more rate cuts to come is at odds with the market’s assessment that the monetary policy cycle of 425 basis points of rate cuts in seven months had run its course, amid tentative signs of life within the domestic economy and the improved tone offshore.
Perhaps it is concerned that with the crude, but apparently quite effective, injections of cash into the economy by the Rudd Government over; and some lags before the switch in emphasis towards infrastructure spending starts to have an impact; there will be another sharp fall-off in activity and a steeper surge in unemployment.
Even a vague musing about the possibility of another reduction in official rates is at odds with the ebullience within the sharemarket, which seems to be assuming a quicker and stronger rebound in activity than the central bank.
The RBA appears to see a lengthy period of feeble and fragile activity as companies with balance sheets weakened by the downturn continue to deleverage and shed staff amid tight credit conditions.
The decision to leave rates unchanged last month was seen as a sign of the bank’s cautious optimism. This time the stance appears to be slightly warier and the emphasis has shifted, albeit marginally, towards the prospect of further cuts.
Market economists seem convinced the cycle of monetary easing has ended. However, the RBA remains if anything biased towards further rate cuts. That slightly discordant note is perhaps an indicator that the markets may have gotten just a little ahead of themselves at this still uncertain point in the economic downturn.
This article first appeared on Business Spectator.
