–RBA Policy Bias Remains For Further Easing But Hurdle High
–RBA Likely Considered Cash Rate Cut At Tuesday Meeting
By Sophia Rodrigues
SYDNEY (MNI) – The Reserve Bank of Australia may have refrained from
jawboning the Australian dollar lower in the cash rate statement but that
shouldn’t be taken to mean that it no longer welcomes a further fall. Nor should
it suggest the RBA no longer has an easing bias.
The policy bias remains for further easing although the hurdle for such a
cut remains very high.
It is likely the RBA considered whether it should lower the cash rate at
the board meeting Tuesday, and decided that staying on hold was an appropriate
thing to do.
It may be recalled that not too long ago, on July 22, Governor Glenn
Stevens said “The question of whether they (cash rate) might be reduced further
remains, as I have said before, on the table.” It is therefore unlikely, without
any major news from then to now, that his view had changed.
A rate cut would have been on the table Tuesday because there is still
spare capacity in the economy, and domestic inflationary pressures are contained
due to very slow growth in wages. The RBA also said that overall inflation is
forecast to remain consistent with the target over the next one to two years,
even with a lower exchange rate.
But at this stage, the RBA isn’t convinced about the benefit of a further
cut and is still worried about the risks it would bring, especially to the
housing market.
A hold was therefore considered an appropriate option, with cut options
likely to be revisited at upcoming meetings to gauge whether there are signs of
any significant weakness in the economy, and whether some of the risks seen in
lowering the rate further have abated.
The RBA will also be watching the labor market closely because it is likely
that it is still forecasting a rise in the unemployment rate.
The full details of the RBA’s new forecasts that guided Tuesday’s rate
decision will be published in the quarterly Statement on Monetary Policy, due
Friday.
On the exchange rate, the RBA made a very conscious decision to omit the
line included in previous statements that “further depreciation seems both
likely and necessary, particularly given the significant declines in key
commodity prices.”
By replacing it with “The Australian dollar is adjusting to the significant
declines in key commodity prices,” the RBA is hoping the currency will keep
doing what it needs to do without further jawboning. The RBA also hopes a rate
hike by the Federal Reserve would put downward pressure on the currency. The RBA
doesn’t consider the timing of the hike – whether in September or later in the
year – to be an important factor for Australia.
What the RBA is not suggesting is that the exchange rate is at a fair
level. A further fall would be welcome, remains its message, judged by the fact
that it expects inflation to remain within target even if the exchange rate
falls further.