Another Possible Future Australian Interest Rate Cut Still in Play

April 2, 2013

The Reserve Bank of Australia monthly Board meeting ended with the as-expected decision to stay in wait-and-see mode.  Between November 2011 and December 2012, five 25-basis point cuts and one 50-bp reduction of the Official Cash Rate (OCR) were implemented, slashing such from 4.75% to 3.0%, which matches the 2009 low.  In today’s new statement, the Board reaffirms its forecast “that inflation will be consistent with the target over the next 1-2 years” and that “growth is likely to be a little below trend over the coming year.”  Sub-trend demand, subdued labor costs, and the push to improve productivity are three disinflationary forces that should continue in coming quarters.

Today’s statement again calls prior monetary easing substantial and repeats the view that economic stimulus from those cuts has not yet been felt fully, hence the prudence of a wait-and-see policy mode.  But a conspicuous deletion in today’s statement that was included previously involves the next-to-last sentence that reads “at today’s meeting, the Board judged that it was prudent to leave the cash rate unchanged.”  That sentence was longer in last month’s statement that read, “At today’s meeting, taking into account the flow of recent information and noting that there had been a substantial easing of policy as a result of previous decisions, the Board judged that it was prudent to leave the cash rate unchanged.”  In central bank-speak, slight innocuous modifications in phraseology are seldom accidental and usually inserted to cue market participants to rising or falling future policy probabilitites.  If inflation stays as low as expected and demand moves under the comfort level of policymakers, they are prepared to cut the OCR below the 2009 trough.



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