The dropping of the explicit easing bias and the rally in the Australian dollar back above 79 cents yesterday after the RBA decision to cut rates has troubled some economists.
Currency traders loved it because in a world of super low rates and a potential US tightening cycle it suggested that the RBA is in no rush to take rates lower.
TD Securities’ head of Asia Pacific Research Annette Beacher was so disappointed that she wrote that the RBA had wasted a bullet. She went further, saying that:
Today’s cut is not only a waste of a bullet, it has the potential to merely exacerbate the existing imbalances in the economy, i.e. hot housing and record levels of household debt, while exports (mining and non-mining) push up against an overvalued exchange rate.
But while currency traders and Australia’s economic community focused on the lack of words promising another cut sometime soon, the truth about the RBA’s bias is that whether they have tended toward lowering or increasing interest rates as the economy has evolved over the past 20+ years, they have always had a fairly easily understood mantra which drives their actions.
That mantra, or bias, comes from their mandate under section 10(2) of the Reserve Bank Act which states:
It is the duty of the Reserve Bank Board, within the limits of its powers, to ensure that the monetary and banking policy of the Bank is directed to the greatest advantage of the people of Australia and that the powers of the Bank under this Act and any other Act, other than the Payment Systems (Regulation) Act 1998 and the Payment Systems and Netting Act 1998, are exercised in such a manner as, in the opinion of the Reserve Bank Board, will best contribute to:
(a) the stability of the currency of Australia;
(b) the maintenance of full employment in Australia; and
(c) the economic prosperity and welfare of the people of Australia.’
The section in bold in layman’s terms translates to “do least harm”.
Which means that in weighing up the prospects for markets after the cut yesterday and in framing the Governor’s statement, the team at the RBA most likely figured that they could trade off a little bit of Aussie dollar volatility, as a result of no explicit easing bias, rather than injecting more heat into the Sydney property market via the promise of even lower rates.
That’s the key. The RBA has to manage a small open economy with an almost perfectly free floating exchange rate to the best interest of all Australians.
Yesterday they decided they didn’t need an explicit easing bias in the Governor’s statement. But they also know that at 11.30am AEST on Friday they release their quarterly statement on monetary policy.
They have more than enough room to explain their actions and there is every chance that the market realises that until the Australian economy successfully and sustainably makes the transition out of the mining investment boom, that the RBA continues to have an easing bias.
It’s how it will do least harm. It’s just not explicit.