The RBA set the cat amongst the pigeons yesterday, by dropping the ‘scope to ease’ section from their concluding paragraph. It now reads:
At today’s meeting, the Board judged that the setting of monetary policy remained 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 target.
Which sharp eyes have noted is missing the ‘scope for further easing’ line that has appeared in pretty much every statement this year.
The below is from July, for example:
At today’s meeting the Board judged that the easier financial conditions now in place will contribute to a strengthening of growth over time, consistent with achieving the inflation target. It decided that the stance of monetary policy remained appropriate for the time being. The Board also judged that the inflation outlook, as currently assessed, may provide some scope for further easing, should that be required to support demand.
This was exactly the concluding paragraph that i expected, however the market reaction surprised me (higher AUD by about half a cent, short end yields up by ~10bps).
The reason – i do not believe that the RBA has lost their easing bias. At best, they are data-dependent, and expect to cut further. They must be … they are forecasting a long period of below trend growth and sub target inflation, and the expected hand off from mining investment to non-mining investment seems further away following the Q2 capex survey.
So why go to what is clearly a more neutral stance?
I guess it is that no one can forecast capex or commodity prices or the AUD.
Though they did not upgrade global growth in the statement (something i had expected they would do) the risks surrounding each of these categories have diminished with the recent strength of major market manufacturing PMIs.
So while the RBA knows that monetary conditions remain too tight, who knows, there may be a pickup in demand, an increase in prices, or a further drop in the AUD that changes this fact?
At this point their settings are unlikely to stabilise the unemployment rate. More is needed from someplace.
It seems to me that the RBA is buying the USD-stronger story, near the peak and a few weeks before Sep-taper. The market has pretty much priced in the good USD story – i doubt the Fed is going to boost the USD by all that much more. This means that the RBA is unlikely to get the easing via the AUD that they so clearly desire.
Next move remains down – timing is probably H1’14.