Today's RBA statement was near-identical to last month's, with the major change being a new warning that unless productivity improved the RBA would struggle to hit its inflation target and may therefore need to lift rates. That was my take-away. And the fact that the RBA has made it crystal-clear that they will need a "material" weakening of demand to make any further cuts. Given this, it is fascinating to see the divergent responses to the RBA's statement. Julia Gillard's former advisor, Stephen Koukoulas, tweeted afterwards:
"Very very dovish from RBA.... the statement could have validated a rate cut. Maybe it needs the next jobs number or CPI to go...Reading the RBA, it's hard to know why it didn't cut given its assessment of things."
Koukoulas reaffirmed this view in a subsequent blog posting, commenting, "The Statement from RBA Governor, Glenn Stevens, was very dovish. Indeed, the words are more aligned to the announcement of an interest rate cut than to leaving rates steady."
In contrast, Macquarie Bank's Brian Redican argued:
"Reserve Bank of Australia (RBA) officials have made it abundantly clear that they were happy with the way the domestic economy is performing in 2012, less concerned about the rest of the world, and comfortable with the current level of interest rates. Given this, it was always likely that they would leave rates unchanged at the March Board meeting. Given that, the key question is whether there has been any subtle shift of views from the RBA over the last month.
The statement released after the March Board meeting, however, is almost identical to the February statement. Growth is "still close to trend", the unemployment rate has remained "steady over recent months", "credit growth remains modest" and inflation provides scope to cut rates, but only if "demand conditions weaken materially".
But while the statement is almost identical to the previous month, there is an important change. And that is the introduction of comments on "considerable structural change" and the observation that the RBA's forecast for ongoing low inflation is conditional on an "expectation that productivity growth will improve somewhat as a result of the structural change occurring in the economy."
RBA officials, in particular the Deputy Governor Phil Lowe, have spoken about these issues in several speeches. But this is the first time that the RBA has elevated these issues into the Statement that is released after the monthly Board meeting. In our view, this could signify that policy is becoming more influenced by the medium term imperative of driving structural change, and less by the monthly data flow."
