The June RBA Statement was basically a return to the situation prior to the surprise cut in May (with fewer words). The bottom line remains that the RBA could cut their policy rate at any meeting — because things must improve.
The statement itself contains fewer words, and few changes in sentiment. There are, however, some notable tweaks to the last two bits: aimed at playing down the decline in the currency, and making their easing bias explicit. My guess remains that the next two cuts will come following the quarterly CPI prints.
I am surprised at the confusion that surrounds the FX issue — a few months ago, the RBA said that the AUD was over-valued, and cut rates because of it in May. A seven cent decline changes the degree of over-valuation, but not the basic issue … at ~30% higher than the 2002-2008 cycle average, the REER is way too high IF the mining boom is over. We remain at the top of the BIS leader-board for the largest increase in REER this cycle.
Much of the confusion about policy seems to relate to uncertainty about mapping from FX to interest rates. There are some wild elasticities out there — but the reality (as set out in this RBA RDP) is more mundane. A 10% shock to the REER moves inflation by about 50bps over three years, and moves the output gap by about the same amount. A good deal of the increase in inflation is from import prices, — which may or may not be ignored, depending on the broader context.
Leaving aside the debate about import prices as FX adjusts, a 100bps move in the real cash rate moves the output gap by about twice as much over a three-year period, and has about the same impact on inflation. So while a 10% move in the REER maps to ~100bps of cuts in headline CPI terms, it is more like a 50bps cash rate change in growth terms.
With this in mind, I doubt that the AUD is a major obstacle to the RBA easing rates further — which I think is basically the message of today’s post-meeting statement.
There are some notable tweaks to the last two section, which are along these lines.
First, the financial conditions section is a total re-write. I think there are two points that are being made here:
1. Policy is working and there’s more to come from prior easing:
The easing in monetary policy over the past 18 months has supported interest-sensitive areas of spending and has been reflected in portfolio shifts by savers and higher asset values. Further effects can be expected over time.
It’s worth nothing that they said this in April and cut in May, so just so there’s more loaded into the pipe does not mean they cannot cut further.
2. FX was over-valued before, so the move down isn’t troubling:
The exchange rate has depreciated since the previous Board meeting, although, as the Board has noted for some time, it remains high considering the decline in export prices that has taken place over the past year and a half.
The conclusion and summary section has been changed in three ways. Two of these are substantive points, and the third seems to be a communications improvement (aimed at dolts like me who over-emphasised the demand-test prior to May).
1. The 2.75% rate is meeting by meeting (my emphasis):
the stance of monetary policy remained appropriate for the time being
2. There remains scope for further cuts — but note the subtle change from would afford scope to ease policy further. My guess is that this is mostly stylistic, with a common sense adjustment to reflect the fact that they used some of that scope in May, and that the inflation outlook is uncertain given the AUD’s recent decline.
the inflation outlook, as currently assessed, may provide some scope for further easing, should that be required to support demand.
3. The new communications bit: making the inflation link explicit (so if they miss on inflation, they cut), to prevent dolts like me from ignoring absurdly low CPI prints in the future.
the easier financial conditions now in place will contribute to a strengthening of growth over time, consistent with achieving the inflation target