Garry Shilson-Josling, AAP Economist
(Australian Associated Press)
The RBA shows every sign of settling in for a long wait, but economic growth figures on Wednesday could test its patience.
Its latest decision to keep the cash rate unchanged at 2.0 per cent, where it’s been since a cut from 2.25 per cent in May, included no evidence that it sees another cut as likely, despite ongoing sluggish economic growth.
“While growth has been somewhat below longer-term averages for some time, it has been accompanied with somewhat stronger growth of employment and a steady rate of unemployment over the past year,” RBA governor Glenn Stevens said in a statement issued after the monthly get-together of the bank’s board.
He expects inflation to stay in line with the two to three per cent target, and the economy to have “a degree of spare capacity” – in other words, above normal unemployment – for a while yet.
That means the RBA could, if push came to shove, cut the cash rate again to support growth.
But interest rates are already at historic lows, and the exchange rate is finally doing its bit.
“The Australian dollar is adjusting to the significant declines in key commodity prices,” the RBA said.
A lower exchange rate boosts economic growth by diverting domestic spending from offshore to onshore, and encouraging exports.
The announcement ended with a sentence of exceptional blandness, even for a central bank, copied word for word from the previous month’s announcement.
“Further information on economic and financial conditions to be received over the period ahead will inform the Board’s ongoing assessment of the outlook and hence whether the current stance of policy will most effectively foster sustainable growth and inflation consistent with the target,” it said.
It’s not clear what else might possibly inform the board’s decisions.
In any case, the decision came the day before a key batch of information – the June quarter national accounts.
Recent data suggest a slow rise in gross domestic product (GDP) after a stronger March quarter.
The minutes of the RBA’s previous board meeting suggest it is anticipating a slower quarter this time.
But some private sector economists, notably UBS economists George Tharenou and Scott Haslem, have warned a contraction in the quarter is possible.
That’s based on a sizeable fall in corporate profits, less production devoted to business inventory accumulation, falls in housing and non-dwelling building activity, lower business investment in equipment, machinery and minerals exploration, and bigger falls in exports than imports.
But these indicators have been balanced by a strong quarterly rise in public sector spending, unexpectedly strong growth in wage earnings, solid growth in the retail trade component of household spending, and a rise in engineering construction related to the North West Shelf gas field.
If GDP does contract, and the reasons for it seem to be more than temporary, the RBA’s perch on the fence could become a little less comfortable.