Tuesday, 4 June 2013

For the time being

The RBA left the cash rate on hold at its June meeting at 2.75%, with the accompanying statement suggesting a continued easing bias from the bank.  While the RBA stated that current settings of monetary policy will be "contributing to strengthening growth over time", its not clear that they believe that they have done enough, with rates at 2.75% "appropriate for the time being" and with scope for further easing. Lower rates to me seems likely.

The statement did make a slight adjustment to the tone of previous statements, with more emphasis that interest rate sectors are showing signs of life, although adjectives like "subdued" are still used to describe household credit growth.  The Bank also noted the fall in the dollar, although is still seen as high relative to the decline in commodity prices.

What was also interesting was there was no specific mention of different sectors, with the theme of other parts of growth offsetting the decline in mining related investment missing for the first time in many months.  Perhaps the bank sees that we are already past the turning point where investment is starting to fall and other sectors are to pick up the slack.

This transition should be clear in the Q1 GDP data, which look set to be pretty good at ~0.7%QoQ.  Business investment will be a drag along with inventories, but net exports should add ~1ppt and consumption should be steady.

But blindly taking taking the GDP print as positive I think misses the point when it comes to employment prospects.  For example, the big surge in coal exports is a big part of Australia's export strength, but this is a sector under intense pressure given the collapse in prices, with jobs being shed.  This is also true across iron ore and LNG, where cost pressures and annoyed shareholders are pushing for greater capital discipline, which again isn't healthy for job creation.

So the Australian economy remains under pressure and there is more to be done on the monetary policy front.  The catalyst will perhaps be the next inflation print in late July for the August RBA meeting, with monthly measures currently suggesting it will be weak.