The Reserve Bank of Australia is betting that it has done what’s needed to get the economy back up to speed.
The central bank validated expectations that it would leave the cash rate at 2.5 per cent after its monthly board meeting on Tuesday.
The RBA made it clear that it intends to ride out the storm of rising joblessness as its earlier rate cuts do their delayed-action work.
“Looking ahead, the Bank expects growth to remain below trend for a time yet and unemployment to rise further before it peaks,” the RBA said in a statement issued by its governor, Glenn Stevens.
Growth is expected to pick up, helped by the lower Australian dollar and low interest rates, while inflation will stay under control for the next couple of years.
“In the Board’s judgment, monetary policy is appropriately configured to foster sustainable growth in demand and inflation outcomes consistent with the target,” the RBA said.
“On present indications, the most prudent course is likely to be a period of stability in interest rates.”
This marked a distinct change from earlier announcement.
Every post-meeting announcement from September 2012 had included an explicit comment that further interest rates cuts were possible. So this was a very deliberate signal that the RBA has backed away from its so-called “easing bias”.
There was another significant change this month.
For over a year the RBA had persistently referred to the Australian dollar’s strength, which it described as both “uncomfortable” and an impediment to the economy’s transition away from the reliance on the mining investment boom.
But that’s gone from the latest announcement as well.
“The exchange rate has declined further, which, if sustained, will assist in achieving balanced growth in the economy,” the RBA said.
It was a significant shift away from the warning in December that “a lower level would likely be needed to achieve balanced growth in the economy”.
The RBA has moved from trying to talk the Aussie dollar down to trying to talk it out of rising again.
This new approach had a shaky start.
In the minutes following the decision, the Australian dollar zoomed up by four fifths of a US cent.
If it continues to climb, with investors feeling safe from any further rate cuts that would undermine it, then the RBA may have to bring rate cuts back onto the agenda.
But the tone of the announcement suggests it’s determined to tough it out for a few months at least.