There was scope to cut the cash rate on Tuesday, but is there still scope to cut again?
Readers of the latest Statement on Monetary Policy could not have been blamed for thinking the Reserve Bank of Australia (RBA) had suddenly changed its tune.
On Tuesday, the central bank cut the cash rate and conspicuously avoided saying there was scope to cut again if necessary.
Explicit references to “scope” for lower rates have been a staple feature of the RBA’s announcements since last year.
Its omission from Tuesday’s announcement was taken, quite rightly, as a sign that the RBA – while it might well ease policy again later this year – had retreated to the sidelines for the time being.
But the more extensive quarterly statement on Friday appeared, at first glance, to cast doubt on that.
The RBA said that “at its recent meetings the Board had noted that the inflation outlook would afford some scope to ease policy further, if needed to support demand”.
So far, so good.
But then the statement went on:
“The recent price and wage data do not suggest any lessening of that scope from an inflation point of view, and the expectation is for inflation to be consistent with the target even with the effect of the depreciation.”
Was the RBA making a point of saying the “scope” to cut rates still existed, thereby signalling another rate cut was in the pipeline?
Or was it simply pointing out that wage and price figures released ahead of the Tuesday board meeting had not reduced that scope, which allowed the rate cut to go ahead?
As it turns out, the latter interpretation is the right one.
The comment was not intended to be forward-looking.
So, it was not a change of heart between Tuesday and Friday.
It was just a problem with the wording.
Change “do” to “did”, and that key sentence would convey the RBA’s intended meaning without the ambiguity.
The RBA used the scope it had to lower the cash rate to its new half-century low, but whether it sees scope to do it again, it didn’t say.