Last week’s interest rates cut by the RBA could be part of a concerted move by central banks around the world to take more chances to boost growth.
The Reserve Bank’s decision to cut interest rates last week by 25 basis points to 2.75 per cent caught many by surprise, especially considering the bank made only subtle changes to its forecasts on inflation and no change to forecasts on economic growth.
To most observers there was little change in the wording of last week’s statement from the previous month. And indeed there is nothing in the latest quarterly statement suggesting that the Reserve Bank has become gloomier or more positive.
This is seen in the following points, summarised from the RBA’s statement on monetary policy (available in full at http://www.rba.gov.au/publications/smp/2013/may/pdf/0513.pdf).
• There is no change to the outlook for the global economy. It is tipped to grow a little below trend this year before accelerating in 2014. Risks are balanced.
• Inflation is under control in Australia. Underlying inflation could be a bit lower than previously expected in the near term before returning to the middle of the 2-3 per cent target band.
• The unemployment rate may drift a little higher.
• The Australian economy will grow a bit below trend in 2013, that is, 2.5 per cent rather than 3 per cent. But growth will return to trend or average rates in 2014.
• The RBA says “growth in economic activity may have picked up slightly in the March quarter”.
• The main uncertainty is the ‘baton’ pass. That is, will the non-mining sector pick up steam to cover for the slowdown in mining?
• The RBA has revised up its forecast for consumption spending and expects the recovery in home building to continue.
• Productivity growth is strong; in fact “growth over 2012 was well above its average of the past 20 years”.
• Wage pressures are contained.
• The average housing loan rate will be around 2009 lows when recent announced rate changes take place.
• Bank funding costs haven’t changed since early February.
• Household wealth probably rose by 3 per cent in the March quarter after a 1.5 per cent lift in the December quarter.
• The Australian dollar remains high, “notwithstanding the decline in export prices and interest rates”.
• The Reserve Bank is keeping an open mind about whether the speed limit of growth has come down.
What does it all mean?
• Inflation was a bit lower in the March quarter, but not dramatically so. The Reserve Bank hasn’t stepped up its rhetoric about the high Australian dollar, and it hasn’t downgraded its view on the economic outlook. In part, the Reserve probably cut rates because other central banks were doing the same. In other words there is concerted action by all central banks to take a few more chances in boosting growth – to do whatever it takes.
• The Reserve could cut rates again. That was its language last week so it is right to factor in another rate cut. But it may not be necessary. That is, the rate cuts around the globe may work. Certainly the US labour market continues to improve. And the Federal Reserve may give other central banks a leg up by taking the foot off the stimulus pedal and allow the US dollar to appreciate. That would assist non-US businesses across the globe.
Craig James is chief economist at CommSec