The Reserve Bank board gathered today to do two main things: first, consider whether to lower interest rates again and, second, to farewell outgoing Governor Glenn Stevens – this was Mr. Stevens’ last Board meeting in charge before he retires at the end of next week. As all economists surveyed by Bloomberg had expected, the Board decided to leave the cash rate steady at 1.5%, a record low – the cash rate was lowered a quarter point only a month or so ago, so another move today always was unlikely.
Today’s statement announcing the decision contained few surprises, with much of the wording sounding familiar and no explicit policy guidance offered at the end. On the domestic economy, “overall growth is continuing”, helped by low interest rates and despite a very large fall in business investment. There was a whole paragraph on conditions in housing, with the Bank not betraying any obvious increase in anxiety. This is despite home auction clearance rates having soared since the August rate cut. There was nothing much new offered on global conditions.
Similarly, on AUD, there was no sounding of any alarm bells in today’s commentary, even though AUD is 6% higher than it was back in May, when the Board resumed cutting the cash rate. The mantra about an appreciating exchange rate possibly complicating the economy’s “necessary adjustments” was repeated, but there was no real effort made to “jawbone” down the stubbornly high AUD. As before, officials expect inflation to stay low, partly owing to global disinflationary forces.
From here, there likely will be an extended period of stability on official interest rates, which have steadily ratcheted down to the current record low since 2011. It is too early to test how effective the most recent of these rate cuts has been in helping to lift growth in the economy and return inflation to target. Officials will be reluctant, then, to provide another dose of interest rate medicine when the condition of the patient is not yet clear. In the meantime, they will hope AUD weakens to assist the economy’s rotation to more non-mining sources of growth.
The new governor, Philip Lowe, takes over at a difficult time. The economy’s rate of “adjustment” has been excruciatingly slow, and even the Bank’s staff expect inflation to stay below target for a while yet. Yet Dr Lowe has very little room to move on interest rates, should further rate cuts become necessary. Fiscal policy is constrained too, which makes it all the more important that AUD softens as hoped. A rate hike by the US Fed sometime soon would help, but that seems less likely in the wake of the softer jobs report last Friday.