Garry Shilson-Josling, AAP Economist
(Australian Associated Press)
Appropriately, given the background of the Melbourne Cup half an hour after its monetary policy announcement, the Reserve Bank of Australia is hedging its bets.
As expected, the RBA kept the cash rate at its historic low of two per cent, making cautiously positive noises about the economy’s ongoing “moderate expansion” and the “gradual improvement” in business conditions.
“This has been accompanied by somewhat stronger growth in employment and a steady rate of unemployment,” RBA governor Glenn Stevens said in the usual statement issued after the central bank’s board met on Tuesday.
The outlook for inflation, while still consistent with the RBA’s two to three per cent target, has been lowered.
And the RBA is becoming more confident that a major risk, a housing price boom followed by a slump, is being nipped in the bud.
“Supervisory measures are helping to contain risks that may arise from the housing market,” Mr Stevens said.
Both the lower inflation outlook and the less risky housing market give the RBA the option to move rates lower without setting off an inflationary chain reaction in either consumer prices or the housing market.
But the key question is not so much whether the RBA can cut rates again, but whether a cut is needed to stimulate economic growth.
And the RBA is clearly not convinced of the need.
Not yet anyway.
“At today’s meeting the board judged that the prospects for an improvement in economic conditions had firmed a little over recent months and that leaving the cash rate unchanged was appropriate at this meeting,” Mr Stevens said.
In other words, the need was actually less pressing than it was a month ago.
Even so, the RBA is keenly aware of the unreliability of economic forecasts and of the very real possibility that things might not turn out nearly as well as it currently expects.
And, if that happens, the RBA has room to move.
“Members also observed that the outlook for inflation may afford scope for further easing of policy, should that be appropriate to lend support to demand,” the governor said.
Ahead of the meeting, futures market pricing suggested a one-in-three chance of a cut this week and a two-in-three chance before the end of the year.
Since the decision on Tuesday, the market has shifted to price in a cut on December 1 at about 40 per cent.
But it’s fully factored in the move to 1.75 per cent in for the March 1 board meeting, the first meeting following the next round of quarterly inflation figures.