By Malcolm Maiden
In its announcement that it had decided to leave its cash rate unchanged at 3.5 per cent today the Reserve bank reached exactly the same conclusion as it did when it left rates on hold a month ago.
Interest rates are already "a little below their medium-term averages", it says, as it did on August 7. Inflation is not threatening to get out of control, Australia's economic growth is close to trend, and "with a more subdued international outlook than was the case a few months ago, the stance of monetary policy remained appropriate," it says, perfectly replicating its concluding statement four weeks ago.
Subtle changes in the latest communiqué suggest, however, that the the Reserve's bias towards another rate cut has become more pronounced.
It said on August 7 that current assessments were that global gross domestic product would grow "at no more than average pace in 2012." It says the same thing in today's announcement, but adds a new comment that "risks to the outlook (are) still on the downside."
It notes again that commodity prices have declined, but also refers tacitly to the more recent startling drop in the price of iron ore, Australia's most important export earner, saying "some commodity prices of importance to Australia have fallen sharply in recent weeks."
China, Europe weakness
Its commentary on China's growth is also more cautious. A month ago, it said that China's growth had "moderated to a more sustainable pace, but does not appear to be slowing further." Today it says "Growth in China remained reasonably robust in the first half of this year, albeit well below the exceptional pace seen in recent years. Some recent indicators have been weaker, which has added to uncertainty about near-term growth"
The central bank board repeats its view of a month ago that financial markets have reacted positively to signs of progress in addressing Europe's sovereign debt problems - a reference mainly to the plan that European Central Bank President Mario Draghi is working on, to forge an ECB-European Union alliance to buy European sovereign debt, in Spain, notably, driving borrowing costs down in the process.
Now however it also says that "expectations for further progress are high" - a reference to the fact that the markets have already rallied, and that Draghi must now deliver, beginning on Thursday night when the ECB meets to draw up its plan in detail, even as interests including Germany's Bundesbank lobby against ECB intervention.
Justified caution
The new note of caution in the Reserve Bank's commentary is justified. Draghi will hold a press conference after the meeting ends, and if he does not announce firm plans to intervene last month's anticipatory market rally could become a pre-emptive selloff.
The Reserve says once again that capital markets remain open to Australian corporations and that our highly rated banks have had no difficulty accessing funding. It serves up an expanded commentary on the strength of demand in the economy, saying capital spending and "quite firm" consumption growth in the first half year supported growth.
It adds however that some of the strength in consumption growth was temporary - a fact borne out on Monday when weak retail sales figures for July showed that a household income boost from government cash handouts in May and June has tailed off - and while it says nothing else about resources sector spending, that source of activity in the economy is near or at its peak.
Mining expansion plans will be scaled back or postponed from now on as companies react to lower commodity prices. Fortescue's decision today to slow its iron ore mining ramp-up and cut this year's capital expenditure by a quarter from $US6.2 billion to $US4.6 billion is the latest example.
The Reserve's concluding comments are again of the glass-half-full variety, a perspective that Reserve Bank governor Glenn Stevens has said is justified given where Australia sits, generally.
Again however, its position is subtly finessed compared with a month earlier.
On August 7 it said earlier rate cuts were still working their way through the economy, that dwelling prices had already firmed a little and business credit "has over the past six months recorded its strongest growth for several years."
This time it says "business credit has picked up this year," a less buoyant call that is in tune with what is still lacklustre credit growth across the economy.
Dollar storm
The Reserve generated a storm of interest after its August 7 meeting when it noted explicitly that the Australian dollar was very high. The currency "remained high, despite the observed decline in the terms of trade and the weaker global outlook' it said then, in a comment taken by some as a possible pointer to intervention to try and pull the currency down, easing the pressure on exporters and companies here that compete against imports.
In its statement today, it says the currency "has declined over the past month or two, though it has remained higher than might have been expected, given the observed decline in export prices and the weaker global outlook."
That comment and the others it has made suggests that it is still on a watching brief, and as we wait for news from Europe and more local evidence, that makes sense. (The dollar climbed off near-six-weeks lows against the greenback after the RBA verdict.)
Tomorrow's national accounts will confirm that the economy hasn't stalled. Growth in the year to June is probably going to come in at about 3.5 per cent, slightly better than the long-term trend.
Growth has probably dipped below a 3 per cent annual rate since June 30, however, and the central bank is watching closely.
It is still poised to cut its cash rate - and on the strength (or, rather weakness) of recent data, will do so before the year is out.