The Reserve Bank’s decision to cut the cash rate to 3% appears to have been taken – perhaps belatedly – to stimulate the non-mining sectors of the economy as well as provide a greater buffer against further global economic weaknesses.
Many will argue that it has come too late and that the RBA should have made adjustments earlier for struggling sectors like manufacturing, retail and tourism.
It also suggests some inconsistency in thinking (as pointed out rather harshly by Business Spectator’s Adam Carr) when looking back at concluding remarks in the November statement with the RBA content to adopt a wait and see approach as to the impact of earlier rate cuts.
“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,” said Glenn Stevens in his November statement.
The December statement says growth has been “running close to trend over the past year” and that inflation is “consistent with the medium-term target”, so on those two fronts the need for a rate cut cannot be argued.
The conclusion which can then be drawn is that concerns about the world economy and the need for stimulus of the non-mining sectors of the economy have finally become uppermost in the mind of the RBA.
Certainly, the housing market is not worrying the RBA as much as it has previously, with Stevens noting in his December statement that there are “indications of a prospective improvement in dwelling investment, with dwelling prices moving a little higher, rental yields increasing and building approvals having turned up”.
And access to capital for big business and banks is also not a problem in the minds of the RBA board members.
“Capital markets remain open to corporations and well-rated banks, and Australian banks have had no difficulty accessing funding, including on an unsecured basis. Borrowing conditions for large corporations are similarly attractive and share prices have risen since mid-year,” said Stevens.
Indeed, such statements could have been taken to justify a rate hold.
But clearly the two-speed economy is a serious concern.
“Available information suggests that the near-term outlook for non-residential building investment, and investment generally outside the resources sector, remains relatively subdued. Public spending is forecast to be constrained,” said Stevens in his December statement.
Adding to this, the RBA is also concerned about the forecast slowdown in the mining investment boom and that other sectors of the economy will need to grow to keep the economy on track.
“In Australia, most indicators available for this meeting suggest that growth has been running close to trend over the past year, led by very large increases in capital spending in the resources sector, while some other sectors have experienced weaker conditions.
“Looking ahead, recent data confirm that the peak in resource investment is approaching. As it does, there will be more scope for some other areas of demand to strengthen,” said Stevens.
The RBA also highlights a gloomier global outlook with global growth “forecast to be a little below average for a time”, with risks to the outlook “still seen to be on the downside”.
Given the focus on the mining investment slowdown (expected to peak in 2014) and a desire to stimulate the non-mining sectors, further rate cuts should be expected in 2013, perhaps earlier rather than later.