The RBA December policy decision has just been released with the Board keeping the cash rate unchanged at 2.50%, as expected. Consistent from what we’ve seen for several months now it was largely case of control-C, control-V, that is, a cut-and-paste job from previous statements, with the Board keeping the all-important final paragraph, including the line in relation to a period of stability in interest rates, unchanged.
On the global economy it appears that the Board have upgraded their assessment for China and the US. On China, just as they did in November, they suggested ‘weakening property markets present a challenge in the near term’. However, on this occasion, they noted that ‘economic policies have been responding in a way that should support growth’. On the US they described the economy as having ‘continued to strengthen’ where as in November there wasn’t a specific mention. Partially offsetting the bullish tweak there the Board noted that Euro area and Japan ‘have both seen weakness recently’.
On commodity prices the Board now believe that those key to Australia have ‘declined significantly’ as opposed to ‘further’ in November. Despite this, their language towards the Australian Dollar was left unchanged – yes, it’s still ‘above most estimates of its fundamental value’. In what is one of few changes from November to December the Board also noted that ‘differences in monetary policies across the large jurisdictions are affecting markets, particularly exchange rates’ – an interesting statement to make given the Aussie is still deemed to be overvalued. Despite recent data indicating a moderation in house prices the language on housing was left unchanged along with that for investor credit. Keeping with the theme the wording on the domestic economy, monetary policy settings and inflation, apart from a small tweak regarding confirmation of subdued inflation in recent data, was also unchanged.
So, what to make of the statement? In my mind it’s disappointing yet all too predictable. Looking through the document there is nothing other than housing that suggests a need for interest rates to remain steady. Commodity prices have fallen ‘significantly’, demolishing national income. Mining capex is starting to ‘decline significantly’ with spending in other business sectors expanding at ‘varying rates’. Having seen the Q3 capex survey we know this is not enough to offset the decline in mining spend. Government spending is ‘scheduled to be subdued’, inflation within the 2-3% target band with unemployment to remain elevated for ‘sometime yet’. And of course, the Australian Dollar ‘remains above most estimates of it’s fundamental value. ‘I don’t know about you but I can’t see why just some of those factors, let alone all, don’t warrant a further policy easing. Whilst we didn’t get it today, like others who are now adjusting their forecasts for further easing, I still expect it’ll arrive should the status quo remain.