By Greg Peel

The Considerations for Monetary Policy section of the minutes of the RBA's September policy meeting were relatively brief. The board remained of the view that while the domestic economy was now struggling somewhat and acting as an offset to the benefits of ongoing high commodity prices, medium term the outlook still "appeared positive".

The problem, however, continues to be Europe and, to a lesser extent, the US. And things aren't improving. In August, the board noted "considerable uncertainty" regarding when the fiscal problems in Europe and the US would be resolved and what effect ongoing volatility would have on the global economy. In September, the board stated straight off that "The international outlook has become significantly more clouded" since the August meeting.

No prizes for guessing why, but the problem for the RBA is that there is "little evidence available to help gauge the effects of the European and US problems on other regions". In other words, whether as once upon a time the adage was that if America coughs Australia catches a cold, these days China provides a whole new world of possibility.

The board thus recognised at the meeting that the domestic economy was going through "considerable structural change", meaning coping with the strong currency and other impacts on traditional industries such as manufacturing and retail, and that this was causing "difficulties". It also noted, nevertheless, there there hadn't been much change on the China front. That's why the medium term outlook still looks okay.

In August, the board decided it was not the time to raise the cash rate given the global uncertainty. It suggested that slow credit growth in Australia and the impact of the strong currency were providing sufficient "restraint" that would keep a lid on inflation in the shorter term. The next move would depend on assessing ongoing developments.

In September, there was no talk of why the cash rate should not be raised. Clearly subsequent developments in Europe meant a rate rise was not even on the table. Again it would all come down to monitoring developments. But the important point is that there is a subtle difference in the September conclusion.

In August, the board concluded:

"Having considered all these factors, members judged that it was prudent to leave the setting of monetary policy steady at this meeting, and to continue to assess the outlook for growth and inflation at future meetings."

In September, the board concluded:

"As further information became available on the domestic and international economies, members would continue to assess the medium-term outlook for inflation and growth. For the present, however, members considered that the current setting of monetary policy left the Board well placed to respond to evolving global and domestic economic conditions."

In other words, we've gone from "prudent to leave the rate unchanged" to "well-placed to respond to what might happen next". That can only mean that for the first time since the GFC, the RBA is hinting that it will cut its cash rate if circumstances dictated.

Read the full minutes here.

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