By Greg Peel
"At today's meeting, with prices data slightly higher than expected and recent information on the world economy slightly more positive, the Board judged that the stance of monetary policy was appropriate for the time being."
That's about the crux of it. Today the RBA board decided not to cut its cash rate once more at this time, having cut in October, leaving the rate at 3.25%. November has proven a more popular month than October for the central bank to change rates over the past few years given the third quarter inflation result falls in between these meetings. This "on hold" decision breaks a run of seven consecutive November rate changes (up or down).
Yet inflation was very much to do with not changing the rate in what appears to be a general easing cycle for the RBA. Note "price data slightly higher," above. "Recent outcomes on inflation were slightly higher than expected" the board observes, "though they still show inflation consistent with the medium-term target".
In October the observation was simply "Inflation has been low, with underlying measures near 2% over the year to June and headline CPI inflation lower than that". So this month the RBA is being careful not to let the inflation genie out of the bottle, although the board this month observes, "conditions should work to contain pressure on labour costs in sectors other than those directly affected by the current strength in resources".
The "world economy" was cited as the other specific reason not to cut. Last month the RBA noted, "The outlook for growth in the world economy has softened over recent months," while this month, "Global growth is forecast to be a little below average for some time". However last month the board noted "Growth in China has slowed," while this month, "recent data from China suggests growth there has stabilised". The only other change to be an upgrade in US growth perception from "modest" to "moderate".
So there are your two reasons not to cut the rate this month, after having cut last month ? inflation just ticking up a tad, and China stabilising. However, there suddenly appeared in the middle of the November statement a comment on the domestic economy which was completely absent, one way or the other, in the October statement:
"Some of the consumption strength in the first half of 2012 was temporary, but there have been some signs of ongoing growth, though a return to very strong growth in consumption is unlikely. While investment in dwellings has been subdued for some time, over recent months there have been some indications of a prospective improvement. Non-residential building investment has remained weak. Public spending is forecast to be subdued."
So there's another vague reason not to cut this month.
And here's another one:
Last month the board recalled the cuts to date (which at that point meant the 50bps in May and the 25bps in June) and noted, "There are tentative signs of this starting to have some of the expected effects, though the impact of monetary policy changes takes some time to work through the economy. However, credit growth has softened of late and the exchange rate has remained higher than might have been expected, given the observed decline in export prices and the weaker global outlook".
This month, " While the impact of these changes takes some time to work through the economy, there are signs of easier conditions starting to have some of the expected effects. Business demand for external funding has increased this year, the housing market has strengthened and share prices have risen in line with markets overseas. The exchange rate, though, remains higher than might have been expected, given the observed decline in export prices and the weaker global outlook".
No longer are the signs "tentative" and otherwise things look quite positive, on the whole. So again ? no reason to cut.
The bottom line, however, is that just about everyone on this and any planet expects Australia to enter 2013 with a 3.00% cash rate, which after today will require a cut in December. So what does the RBA think?:
"Further effects of actions already taken to ease monetary policy can be expected over time. The Board will continue to monitor those effects, together with information about the various other factors affecting the outlook for growth and inflation." Last month the board did not suggest it would "monitor the effects," even though we know it always will, so this is code for "the data will be important.
Read the full minutes here.