RBA begins easing cycle

November 1, 2011

RBA and Interest Rates

The RBA today signaled the start of an easing cycle not simply a one-off move in the cash rate.

The rhetoric that they used was heavily slanted toward the risks associated with the current economic outlook with only a passing glance at the once dominant mining engine. Equally as you can see in the Wordle pictogram of the statement below inflation is the key theme and trigger for that has allowed the concerns for the future to predominate.

 

The key thing to highlight here is that wordle is  interpreting what the RBA has said in terms of frequency not what they say about what they say. So we then need to assess what they say about inflation which I will do later on in this piece. But in summary I would say that in this statement the RBA focus is on why inflation IS NOT and issue where as previously it was THE  issue for many many months of late 2010 and 2011

  Here are the key sentences in the statement and the full statement is attached in the link below.

 Negatives for growth  

  • Recent information is consistent with a moderation in the pace of global growth,
  • The pace of US economic expansion picked up in the September quarter, but is still only moderate and leaves considerable spare capacity.
  • China’s growth has slowed, as policymakers there had intended.
  • …it is likely to be some time yet before concerns about the European situation can definitively be laid to rest and the effects of the recent turmoil on confidence may result in a period of precautionary behaviour by firms and households.
  • The terms of trade have now peaked and will decline somewhat in the near term,
  • cautious behaviour by households and the high exchange rate have had a noticeable dampening effect.
  • The unemployment rate has increased a little over recent months, though it remains close to 5 per cent.
  • Financial conditions have been easing somewhat recently, with market interest rates declining a little and competition to lend increasing.  But overall conditions have remained tighter than normal, with borrowing rates still a little higher than average, credit growth subdued and asset prices lower than earlier in the year. The exchange rate has been very variable over the past few months, but on the whole has remained at historically high levels.

 Positives for growth  

  • The terms of trade have now peaked and will decline somewhat in the near term, but they remain very high.
  • In response, investment in the resources sector is picking up very strongly, with much more to come.
  • Some related service sectors are enjoying better-than-average conditions.

 Inflation

  • underlying inflation started to pick up in the first half of the year, recent information suggests the subdued demand conditions and the high exchange rate have contained inflation more recently, notwithstanding continuing sizeable increases in utilities charges
  • with labour market conditions now softer, the likelihood of a significant acceleration in labour costs outside the resources and related sectors in the near term has lessened. Accordingly, the Bank’s current judgement is that inflation is likely to be consistent with the 2–3 per cent target in 2012 and 2013, abstracting from the impact of the carbon pricing scheme.

 So all in all the RBA is more concerned about the prospects for domestic and global growth and less concerned about inflation. That leaves them with a

                 more neutral stance of monetary policy

 And in my view more room for rate cuts in the months ahead. Most likely February next year unless Europe implodes.

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