As they have done since May last year, the Reserve Bank of Australia board left interest rates unchanged at 2.0% at the conclusion of its March monetary policy meeting.
While that was all but expected by markets and economists alike, there were a few surprises in the accompanying monetary policy statement, particularly when it came to the bank’s view on the current state of the domestic economy.
Here’s what the bank conveyed in February.
In Australia, the available information suggests that the expansion in the non-mining parts of the economy strengthened during 2015 even as the contraction in spending in mining investment continued. Surveys of business conditions moved to above average levels, employment growth picked up and the unemployment rate declined in the second half of the year, even though measured GDP growth was below average. The pace of lending to businesses also picked up.
And here’s the view the bank offered today.
In Australia, the available information suggests that the expansion in the non-mining parts of the economy strengthened during 2015 despite the contraction in spending in mining investment. This was reflected in improved labour market conditions. The pace of lending to businesses also picked up.
As you can see it’s far shorter, with references to business conditions removed and the language towards the labour market more cautious than what was seen in February.
Outside of the view offered towards the domestic economy, the changes to the statement were small, although they still provided talking points for markets.
In short, taken together, the RBA has moved closer to cutting interest rates.
On the Australian dollar the bank noted that “the exchange rate has been adjusting to the evolving economic outlook”, a slight tweak on the wording used in February when it noted “the exchange rate has continued its adjustment to the evolving economic outlook”.
One way to interpret the removal of the observation that the dollar “has continued its adjustment” – in favour of the more backward-looking comment that it “has been adjusting” – is that it’s a recognition that the Australian currency seems to have found a floor around the 70c mark.
It’s subtle, but such is the nature of reading the language of central bankers.
The bank also suggested that “commodity prices have declined very substantially over the past couple of years”, moving away from the view offered in February where commodity prices had “declined further”.
Even the final paragraph of the statement, that which contains the RBA’s view on the outlook for interest rates, provided a talking point.
In March the bank suggested that “continued low inflation would provide scope for easier policy, should that be appropriate to lend support to demand”. This compares to February where the bank noted that “continued low inflation may provide scope for easier policy, should that be appropriate to lend support to demand”.
Again, it’s a subtle tweak, but suggests the inflation outlook is no longer an impediment to lowering interest rates if it becomes necessary.
As was the case in February, the board also acknowledged that “new information should allow the Board to judge whether the improvement in labour market conditions is continuing and whether the recent financial turbulence portends weaker global and domestic demand”.
While they remain in wait-and-see mode, on face value the March statement reads more dovish than what was the case in February, suggesting that the bank is moving closer to, rather than away, a further reduction in interest rates.
Upcoming domestic labour market data, along with expectations for monetary policy from other major central banks, will likely determine whether or not the RBA will see the need to act.
The full March monetary policy statement from RBA governor Glenn Stevens can be accessed here.