As usual it pays to compare and contrast the statements issued after each RBA board meeting.
It’s all in the wording, which shows attitudes and approaches, and clues to future moves.
For example, we now see from yesterday’s statement that the RBA believes demand has slowed enough to give it room to cut rates.
The areas highlighted show the change in thinking.. go to the August 5 statement and compare them with the bits in italics.
The bank did remind us of its concern about the current high inflation rate (4.5% and likely to crest towards 5% over the next two quarters, according to the bank).
That’s a reminder to the market not to get too far ahead of itself in anticipating further rate cuts and changing consumers’ expectations about prices.
The RBA has now given itself the policy flexibility to go down whatever policy path it wants.
That’s why we shouldn’t forget the continuing inflationary pressures. The bank has given itself the freedom to move rates in any direction, even if the trend will be down.
After the meeting yesterday:
At its meeting today the Board decided to lower the cash rate by 25 basis points to 7.0 per cent, effective 3 September.
Inflation in Australia has been high over the past year in an environment of limited spare capacity and earlier strong growth in demand. In these circumstances, the Board has been seeking to restrain demand in order to reduce inflation over time.
As a result of increases in the cash rate last year and early this year, additional rises in market interest rates and tougher credit standards, financial conditions have been quite tight. Some further tightening has occurred over the past couple of months. Conditions in international financial markets remain difficult, with heightened concerns over credit persisting.
The evidence is that the tight financial conditions, in conjunction with other factors including higher fuel costs and lower asset values, have exerted the needed restraint on demand. Indicators of household spending have recorded subdued outcomes over recent months, and credit expansion to both households and businesses has slowed.
Surveys suggest a softening in business activity and growth in production has slowed. Indicators of capacity utilisation, while still high, are declining and there have also been some signs of an easing in labour market conditions.
The rise in Australia’s terms of trade that has occurred is working in the opposite direction, adding substantially to national income and ability to spend.
Fixed investment spending by businesses continues to be very strong. At the same time, high prices of oil and a range of other commodities have added to global inflationary risks. They are also dampening growth in a number of countries.
Given the opposing forces at work, considerable uncertainty has surrounded the outlook for demand and inflation. On balance, however, it is looking more likely that household demand will remain subdued and overall economic growth slow over the period ahead. Inflation is likely to remain relatively high in the short term, with the CPI affected by the high global oil prices in mid year and other increases in raw materials prices.
But looking further ahead, the outlook for demand suggests that inflation in both CPI and underlying terms is likely to decline over time, provided wages growth remains contained. The Bank’s forecast remains that inflation will fall below 3 per cent during 2010.
Weighing up the available domestic and international information, the Board judged that there was now scope for monetary policy to become less restrictive. The Board will continue to assess prospects for demand and inflation over the period ahead, and set monetary policy as needed to bring inflation back to the 2-3 per cent target over time
After the August 5 board meeting:
Inflation in Australia has been high over the past year in an environment of limited spare capacity and earlier strong growth in demand. This was evident again in the most recent CPI data. In these circumstances, the Board has been seeking to restrain demand in order to reduce inflation over time.
As a result of increases in the cash rate last year and early this year, additional rises in market interest rates and tougher credit standards, there has been a substantial tightening in financial conditions since the middle of 2007. Some further tightening has occurred over the past couple of months. Conditions in international financial markets remain difficult, with heightened concerns over credit persisting.
The evidence is that the tightening in financial conditions, in conjunction with other factors including rising fuel costs, and lower asset values, has restrained demand.
Indicators of household spending have continued to record subdued outcomes over recent months, and credit expansion to both households and businesses has slowed significantly.
Surveys suggest a softening in business activity, and there have also been some early signs of an easing in labour market conditions.
The rise in Australia’s terms of trade that is currently occurring is working in the opposite direction, adding substantially to national income and ability to spend. At the same time, high prices of oil and a range of other commodities have added to global inflationary risks. They are also dampening growth in a number of countries.
Given the opposing forces at work, considerable uncertainty has surrounded the outlook for demand and inflation.
On balance, however, it is looking more likely that demand will remain subdued, and economic growth will be fairly slow, over the period ahead. Inflation is likely to remain relatively high in the short term, with the CPI affected by high global oil prices.
Looking further ahead, inflation in both CPI and underlying terms is likely to declin
