CANBERRA: The Reserve Bank of Australia on Tuesday held the cash rate at 2 per cent for the sixth month in a row, but left the door open to another cut if growth and inflation fail to pick up in the next few months.
Striking a slightly less fixed tone about current settings, RBA governor Glenn Stevens said in his statement that “the outlook for inflation may afford scope for further easing of policy, should that be appropriate to lend support to demand”. Markets and analysts immediately seized on the comments, and interest rate pricing around the possibility of a third cut in the current cycle, in February, soared to 100 per cent.
The Australian dollar, too, eased at first before gradually climbing above US72¢ for the first time in a week. In late local trading it was back down at US71.95¢, compared with US71.65¢ just before the RBA decision. All eyes are now on this Friday’s quarterly statement on monetary policy, where the RBA is expected to downgrade its inflation outlook and could tweak its growth forecast.
The latter, in the past, has been a precursor to rate cuts. “We see this as more dovish than previous commentary and can be viewed as an official easing bias,” said Charlie Jamieson from Jamieson Cootes Bonds in Melbourne.
“Clearly the RBA are now highly sensitive to any weaker data going forward that could derail economic conditions,” he said. Tuesday’s decision was widely expected, despite the surprisingly soft third-quarter inflation reading last week and credit tightening by Australia’s four main lenders, who have been making investor mortgages more expensive.
By increasing the interest rates charged to buy-to-let and buy-to-sell investors, the banks have helped take some of the heat out of the Sydney and Melbourne housing markets, allowing the RBA to lower rates again without re-stoking price inflation. Mr Stevens acknowledged recent mortgage rate increases by the four main lenders, but said overall conditions were still quite “accommodative”.
“Credit growth has increased a little over recent months, with growth in lending to investors in the housing market easing slightly while that for owner-occupiers appears to be picking up,” he said.
“Dwelling prices continue to rise in Melbourne and Sydney, though the pace of growth has moderated of late.” More importantly, say economists, the RBA signalled it was concerned enough about the slowing pace of consumer price index growth to consider another cut.
Although low inflation is desirable, when prices drop too much consumers and businesses hold back on spending and investment, respectively, while the relative cost of debt rises. If the trend is allowed to become a deflationary spiral, the impact can wreak economic carnage.
Deflation is unlikely to take hold in Australia, but central banks around the world have been vigilant for the last year against the possibility of an outbreak in the face of falling energy and other input prices.
“Overall, [Tuesday’s] statement highlights the importance of inflation to the RBA,” said Australia and New Zealand Banking group’s co-head of Australian economics Felicity Emmett. “That is, despite the prospect of some improvement in activity the bank seems prepared to ease monetary policy on the back of a lower inflation outlook.
“This then suggests that a move in December is unlikely; the RBA seems more likely to wait until February when it will have another inflation number which will likely confirm the lower than previously anticipated inflation trajectory,” she said.
