RBA happier as a penguin than a dove

It’s relatively rare for Reserve Bank board minutes to matter much when they’re in the same month as a quarterly statement on monetary policy.

This month has proved to be an exception with the markets reacting sharply, pushing our dollar up and the chances of another interest rate cut down.

What’s sparked the reaction is the idea that the minutes show the RBA wasn’t particularly gung-ho about this month’s rate cut, that it was actually a close call despite the lower-than-expected inflation figures and the RBA subsequently lowering its inflation forecast.

The thinking is that if the bank wasn’t keen to cut after the CPI shock, it would be less keen to cut again now that lower inflation looks is the new normal.

It's a small consolation for those in the commentariat, including me, who thought the bank would leave rates steady this month.

We were wrong, but not entirely wrong - the RBA wasn’t as spooked by the low inflation number as others claimed.

There were still good reasons for the RBA to act like an Emperor penguin, sitting still on the monetary egg, rather than fluttering away as a monetary dove.

Given much of what the bank heavyweights have been saying in various speeches and interviews about the problem of being near the limit of softer monetary policy, there good reasons to think the RBA is indeed uncomfortable with the idea of being dovish.

It’s more with sad resignation than hard resolve that the governor has had to use his blunt instrument again.

That’s the unfortunate message somewhat between the lines in today’s minutes: a little sigh that the chances of economic growth improving are entirely dependent on money remaining very cheap and the Aussie dollar low.

And even with record-low interest rates and the dollar now quite a ways below parity, the RBA is saying there’s not much grunt about our economy.

That means it’s not expecting the unemployment rate to fall much in the year ahead and the longed-for pickup in non-resources investment remains longed-for rather than happening.

For mine, it was the RBA’s perception of the labour market softening a bit as much as the inflation figures that pushed it to cut rates. The element of sad resignation comes from the knowledge that cutting rates isn’t making much difference to that.

Which is why I keep coming back to what the governor and governor-elect have repeatedly suggested: it would be a good idea for the federal government to do more to assist economic growth through greater investment in our soft and hard infrastructure.

Neither side in this federal election is taking up the suggestion. Oh, they’re talking the talk about infrastructure, but they’re pulling up a long way short of the sort of investment the RBA has envisaged.

The RBA is not alone is pointing out the limitations of monetary policy at this level. Just the latest contribution to the suggestion box is a paper by KPMG that could have been written out of RBA research notes.

The big accounting and consultancy firm reckons investing in infrastructure and education is about the only option left for heading off a decline in living standards, that otherwise, this is as good as it gets.

The RBA minutes – and its quarterly statement on monetary policy – basically conclude that our economy is marking time for the next year or so, growing but not growing fast enough to absorb spare capacity. The minutes put it this way:

“Leading indicators of employment had been somewhat mixed: job vacancies reported by businesses had continued to rise, while job advertisements had been broadly flat over recent months.

"These indicators, along with the outlook for output growth, suggested that employment would continue to grow, but at a somewhat slower pace than had been evident over the previous year.

"The unemployment rate had been around 5¾ per cent in recent months and was expected to remain around this level over the next year or so before gradually declining over the forecast period, as output growth increased.

"The outlook for the unemployment rate was broadly in line with the forecasts presented three months earlier and consistent with spare capacity remaining in the labour market throughout the forecast period.”

The further out the RBA or anyone else tries to forecast, the ropier the forecasts get. That hoped-for pick up in non-resources investment remains a bit over a year away – as it has for the past three years.

 

Michael Pascoe is one of Australia's most respected finance and economics commentators with over four decades in newspaper, radio, television and online journalism. He regularly appears on Channel 7's Sunrise and news programs and is a regular conference speaker, MC and facilitator.