There had been predictions months in advance that today’s meeting would result in a decrease of the cash rate, but sentiment had swung in recent weeks towards the bank leaving the cash rate at 2%.
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DBS Bank said that with Australia’s inflation below the official target of 2-3 per cent for the fourth straight quarter in the third quarter, the RBA “may have to revisit its stable rate stance”.
The upshot of the lower than expected near-term inflation forecast is that, according to the RBA’s Statement yesterday, it “may afford scope for further easing of policy, should that be appropriate to lend support to demand”.
Then again, he noted that business surveys pointed to improving conditions outside of mining and that the drag from a downturn in resource investment was about half way through.
“This tells us that there is more spare capacity in the economy than previously thought. Inflation is forecast to be consistent with the target over the next one to two years, but a little lower than earlier expected”.
In its November Statement on Monetary Policy, the Reserve Bank maintained its key forecast that growth in the economy would be 3.00 per cent in the year to December 2016.
The other factor the RBA would have taken into account is the recent round of retail mortgage rate increases by the major banks.
The RBA made a particular effort to note that the lower exchange rate is helping to rebalance the economy from mining to more services led growth. The rate has remained where it is since May but the board said a soft inflation outlook may leave room for a further rate cut if needed. In the past when the RBA altered its policy rate, a journalist had often been given a “tip” to that effect, but the usual suspects have been silent over recent days.
Following the print of the September quarter Consumer Price Index markets priced a probability of a rate cut at around 70%.
The central bank’s judgement that there are signs of an improvement in economic conditions makes it more dependent on upcoming data, but also leaves its options open, the broker asserts, and the decision increases pressure on the commonwealth government to do more with fiscal policy.
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Overnight, the dollar remained lower against the other major currencies on Monday, after data showed that manufacturing activity in the USA expanded at the slowest rate in more than two years in October. There have been fears of a housing bubble, particularly in Sydney and Melbourne, where dwelling prices continue to climb.
