That wasn’t the end of the RBA’s easing cycle …

The market got the RBA statement wrong today — Australian interest rate futures sold off and the AUD rallied following the well anticipated 25bps cut to 2.5%, and it made no sense.

So why did the market get it wrong? As usual it over-interpreted the statement.

Some argued that the RBA had dropped their easing bias. This claim boils down to the following observations about the final paragraph of the statement.

In May, following the move to 2.75%, the final paragraph of the statement was:

The Board has previously noted that the inflation outlook would afford scope to ease further, should that be necessary to support demand. At today’s meeting the Board decided to use some of that scope. It judged that a further decline in the cash rate was appropriate to encourage sustainable growth in the economy, consistent with achieving the inflation target.

This time they didn’t say anything about there being some scope — they said something else:

The Board has previously noted that the inflation outlook could provide some scope to ease policy further, should that be required to support demand. At today’s meeting, and taking account of recent information on prices and activity, the Board judged that a further decline in the cash rate was appropriate. The Board will continue to assess the outlook and adjust policy as needed to foster sustainable growth in demand and inflation outcomes consistent with the inflation target over time.

So what’s this about? Probably nothing — they used a little more of that scope, and whomever drafted the statement decided instead to say that they will continue to look at data and react to it rather than make the obvious point that they had used some of their scope (which was misinterpreted as signalling that they were not inclined to ease further).

Have we seen this before?

Yeah, actually, we have — we saw basically the same thing (allowing for the draftsman’s spice) following the December 2011 meeting, when the RBA cut 25bps to 4.25%.

Overall, the Board concluded, on the basis of all the available information, that the inflation outlook afforded scope for a modest reduction in the cash rate. The Board will continue to set policy as needed to foster sustainable growth and low inflation over time.

I do recall the same stuff about the RBA having lost its easing bias in late 2011, following the December meeting, however I hope the practical fact that the RBA cut their policy rate 175bps since that Dec’11 meeting will overcome whatever scepticism you might have on this point.

So what does the end of an easing cycle look like? How about this from April 2009 …

The stance of monetary policy, together with the substantial fiscal initiatives, will provide significant support to domestic demand over the period ahead.

Sure, the easing cycle may be over (no one can forecast well, and who knows what the next ‘shock’ will bring) — but the RBA doesn’t know that and i don’t think they are more or less dovish at 2.5% than they were in March when the cash rate was 3%.

If the unemployment rate keeps going up and inflation remains low, they will keep cutting the cash rate. That’s what the RBA has always done, and what they should keep doing.