Forex Investment and Currency Trading

As expected, the Reserve Bank of Australia decided to leave the cash rate unchanged at 3.00%.

The most important aspect of the Governor’s Statement was the all important final paragraph where the term “some scope for further easing of monetary policy” was replaced with “monetary policy is appropriate”. This is a clear shift in the policy bias from an easing bias to a neutral bias. The significance of this change is also emphasised by the addition of the term “achieving the inflation target” when describing the factors that will affect future policy decisions. In all recent prior Statements, the only target was described as “sustainable recovery” or “sustainable growth”. When central banks become more confident about avoiding a recession, they naturally switch attention to containing inflation pressures.

Sentiment towards the various checklist of factors has not changed significantly. The global economy is still described as “stabilising” although “downside risks have diminished”. China is decribed as “very strong”, a notch up from “strengthened considerably”. However, to emphasise that the Bank is not complacent about the global economy, this Statement adds the term that downside risks have “not disappeared”.

For the Australian economy, recognition is given to the improvement in confidence (presumably both business and consumer) but the Statement is at pains to note that the near-term outlook is sluggish, with consumer spending likely to slow, and business investment remaining weak. Positive developments on housing credit are recognized, and house prices are described as “have risen over recent months” in contrast with “are tending to rise” (July Statement). While tentative on the near-term, the medium-term outlook has strengthened somewhat with “growth is likely to firm into 2010″ added.

While global credit conditions are still described as difficult, there has been a dash of confidence noted for the domestic markets, with large firms’ access to debt markets being described as “appears to be improving”.

Inflation is still described as gradually moderating/abating, and the Bank remains confident of further moderation over the year ahead. There is special recognition of the higher exchange rate assisting that moderation.

Conclusion

The Bank is likely to have been able to eliminate the easing bias because it has raised its forecast for inflation in 2011. That will partly stem from a higher growth forecast in 2010 as implied above. With inflation forecast to remain at or above the 2% target floor, there is no need to maintain an explicit easing bias. However, the Governor has been sufficiently balanced in this Statement to go out of his way to discourage any talk of an imminent tightening. In particular, the description of the near-term growth outlook was quite downbeat.

As discussed above, there are some more optimistic elements in this Statement than in July. But firmly in the ‘neutral’ policy camp rather than implying a tightening bias. Analysts would not expect that, as the economic data unfolds, there will be a sufficiently strong case to adopt a tightening bias until 2010.