The Reserve Bank has further softened its already soft easing bias and made it clear local interest rates will be cut to ‘lend support to demand’ in the economy should the recent rise in volatility on global markets threaten a slowing in demand and the pace of growth.
The softening in its monetary policy stance curiously helped kick the stock market 50 points lower, but also pushed the value of the Aussie dollar well under 71 US cents, which is what the change was partly intended to do.
This is despite the bank acknowledging that the domestic economy did better than previously assessed in 2015. Governor Stevens said in yesterday’s statement: ”the expansion in the non-mining parts of the economy strengthened during 2015 even as the contraction in spending in mining investment continued.”
Many traders took that as meaning no more rate cuts, but they neglected to read the full statement, especially the renewed concerns about the weak start to the year on markets.
The RBA which is now concerned at what has been happening since the start of the year and the dangers that poses to global growth and the Australian economy.
But in early December, the RBA was more relaxed. The looming Fed rate rise (which subsequently happened) was the major imponderable, along with weak emerging markets. But market volatility had eased.
Two months later and it is a very different stock – volatility has returned, oil prices have plunged, some corporate debt is looking weak and the outlook has changed dramatically for the worse, and this has forced the bank to loosen its outlook and easing bias to reassure markets that the economy will be supported by rate cuts if the proverbial hits the fan globally.
And that is why yesterday’s first RBA board meeting for the year sat on the cash rate of 2%, but made clear in the post-meeting statement from Governor Glenn Stevens that if it had to, the central bank would cut rates to protect jobs and the local economy.
"At today’s meeting, the Board judged that there were reasonable prospects for continued growth in the economy, with inflation close to target. The Board therefore decided that the current setting of monetary policy remained appropriate.
"Over the period ahead, new information should allow the Board to judge whether the recent improvement in labour market conditions is continuing and whether the recent financial turbulence portends weaker global and domestic demand. Continued low inflation may provide scope for easier policy, should that be appropriate to lend support to demand,” the final paragraphs of Mr Stevens’ speech read.
Contrast that to the final paragraph of the December board meeting statement from Mr Stevens:
"At today’s meeting the Board again judged that the prospects for an improvement in economic conditions had firmed a little over recent months and that leaving the cash rate unchanged was appropriate. Members also observed that the outlook for inflation may afford scope for further easing of policy, should that be appropriate to lend support to demand. The Board will continue to assess the outlook, and hence whether the current stance of policy will most effectively foster sustainable growth and inflation consistent with the target,” the December statement concluded.
The change in the February statement is quite significant – there’s the acknowledgement of “the recent financial turbulence” on global markets and whether that could translate into weaker global and domestic growth and there’s the prospect of “continued low inflation (which the statement “is likely to remain low over the next year or two”) giving the RBA “scope for easier policy, should that be appropriate to lend support to demand.”
This is in the face of the domestic economy doing much better in 2015 than previously assumed, as Mr Stevens said in yesterday’s statement:
"In Australia, the available information suggests that the expansion in the non-mining parts of the economy strengthened during 2015 even as the contraction in spending in mining investment continued. Surveys of business conditions moved to above average levels, employment growth picked up and the unemployment rate declined in the second half of the year, even though measured GDP growth was below average. The pace of lending to businesses also picked up.”
Contrast that to the same paragraph in the December 1 statement from the governor:
"In Australia, the available information suggests that moderate expansion in the economy continues in the face of a large decline in capital spending in the mining sector. While GDP growth has been somewhat below longer-term averages for some time, business surveys suggest a gradual improvement in conditions in non-mining sectors over the past year. This has been accompanied by stronger growth in employment and a steady rate of unemployment.”
And looking at the changes in the global economy and markets since the start of the year, Mr Stevens said yesterday:
"Financial markets have once again exhibited heightened volatility recently, as participants grapple with uncertainty about the global economic outlook and diverging policy settings among the major jurisdictions. Appetite for risk has diminished somewhat and funding conditions for emerging market sovereigns and lesser-rated corporates have tightened. But funding costs for high-quality borrowers remain very low and, globally, monetary policy remains remarkably accommodative.”
That is very different to what he said in the December 1 statement about the world economy and markets:
"The Federal Reserve is expected to start increasing its policy rate over the period ahead, but some other major central banks are continuing to ease monetary policy. Volatility in financial markets has abated somewhat for the moment. While credit costs for some emerging market countries remain higher than a year ago, global financial conditions overall remain very accommodative.”
So we have a domestic economy that on the whole has strengthened in the past year (after the two rate cuts in 2015) with jobs growth stronger, and inflation lower than expected, but that is now being threatened by the upsurge in market turbulence and moves by central banks, such as the Bank of Japan to ease its already ultra lose monetary policy, and expectations of similar moves in a month’s time from the European Central Bank.
