Sometimes central banks can say more by saying less.
And what the Reserve Bank of Australia (RBA) left out of the minutes of its July 5 monetary policy meeting was at least as telling as what was included.
The minutes, released on Tuesday, detailed the confused economic picture the RBA’s board faced as it met two weeks ago, ultimately deciding to leave the cash rate steady.
But the omissions of a key phrase said it all.
The minutes of the May 3 meeting warned “higher interest rates were likely to be required at some point”, if the economy proceeded as expected, to keep inflation in check.
The same words were used in the quarterly monetary policy statement published three days later.
The minutes of the June 7 meeting admitted recent news on the economy “had not added any urgency to the need for an adjustment to policy” – but still repeated the view that rates would probably have to be jacked up “at some point”.
And those words were repeated with approval in a direct quote by RBA governor Glenn Stevens in a speech in Brisbane on June 15.
But by the time the July 5 meeting’s minutes were released on Tuesday, the RBA had dropped the phrase altogether.
The central bank still expects the next move in its benchmark cash rate, last adjusted to 4.75 per cent from 4.5 per cent last November, to be upward.
But that expectation is no longer being made explicit.
You have to read between the lines, but it’s there nonetheless.
The minutes included an extended discussion of the “significant downside risk for the global economy” posed by Greece’s ongoing debt saga.
They also included frank acknowledgement of key points of weakness in the local economy – including caution among households and weak business investment outside the mining sector – and a less optimistic outlook for the economy’s recovery from the slump early this year.
But these risks and revisions to the outlook did not change the likely eventual outcome of the recovery, protracted though it is proving to be.
“Notwithstanding this, members considered that the continuing strong economic performance of Asian economies meant that the medium-term outlook for the Australian economy remained strong,” the RBA said in the minutes.
Against the background of low unemployment, that outlook implies the RBA expects to have to lift interest rates again as the economy runs up against limits to its productive capacity.
The central bank is quite obviously betting that, barring a new global financial crisis, the boost to growth and inflation from the export commodity boom will dominate the policy agenda in the coming few years, meaning rates will – in the RBA’s view – rise at some point.
But the lack of an explicit warning to that effect implies not only that the next move has been pushed well into the future, but the RBA can’t confidently rule out the possibility it might turn out to be a cut – possibly the first of several – if Greece’s woes are not contained.
