The Sydney Morning Herald – 2 June, 2015
By Michael Pascoe
Did you see what wasn’t in the Reserve Bank governor’s brief statement? An explicit easing bias. In the carefully measured lexicon of central banker announcements, that matters.
Last month’s meeting was an easing announcement. The month before that, “it was appropriate to hold interest rates steady for the time being”, but “further easing of policy may be appropriate over the period ahead”. Ditto the month before that, which, like Tuesday’s meeting, was the one after a rate cut decision.
“There are shades of meaning here, but that looks like the bank signalling it’s thinking there’s not much to gain by cutting rates again”
That counts as an explicit easing bias after those two meetings, March and April. The RBA copped some silly market stick for not including explicit easing bias with the May decision, but that was just the bank being consistent. It didn’t with the February cut either.
Tuesday’s effort is different. Said the governor in his key final paragraph:
“Having eased monetary policy last month, the board today judged that leaving the cash rate unchanged was appropriate at this meeting. Information on economic and financial conditions to be received over the period ahead will inform the board’s assessment of the outlook and hence whether the current stance of policy will most effectively foster sustainable growth and inflation consistent with the target.”
That last sentence is the RBA saying something like “well, we’ll see what happens next and we’re not going to prejudge it”. The March and April meetings’ final sentence meant “the way things look, we’re keeping our hands on the rate cut lever, ready and willing to ease”.
There are shades of meaning here, but that looks like the bank signalling it’s thinking there’s not much to gain by cutting rates again. The surprise is greater because wording elsewhere in the statement suggests there’s no sign of any improvement in the economy despite the February and May rate cuts.
While the easing bias has gone, a new phrase has been included and the outlook for non-mining investment has subtly worsened. The economy continues to grow, “but at a rate somewhat below its longer-term average”, said the governor.
The expected gross domestic product growth rate is now in the lower 2s, instead of the high 2s when it was “a bit” below trend.
Last month, the statement identified weakness in mining and non-mining capital expenditure as a likely key drag on growth “over the coming year”. Today, that weakness “is likely to persist over the coming year”.
So non-mining capex looks weak for longer – which is not what the federal budget forecast last month.
That’s the bad news – the sort of stuff that might have you suspect an explicit easing bias would be there. The relatively good news was that household spending has improved, including “a large rise in dwelling construction” and exports are rising.
Monetary policy at this stage has little to do directly with export volumes, so we’re left with consumers spending a bit more and the housing construction boom responsible for ending the bias.
Or it could be a broader issue: the RBA’s expressed concern that at this stage of the game, cutting rates is boosting asset prices but not investment. It’s investment that the country needs, not higher asset prices per se.
As usual, much of the commentary on monetary policy, being Sydney based, is seen only through the prism of Sydney real estate. National monetary policy can’t be set to suit Sydneysiders.
The Sydney housing bubble is real enough, everyone except the Prime Minister and Treasurer seem to agree, but that can’t be the RBA’s prime consideration. Funny though that the bias has been dropped when business investment continues to refuse to come to the party.