Downside risks to global economy prompted Reserve Bank to cut interest rates: Minutes of the last Reserve Bank Board meeting confirm that policymakers were concerned about the strength of the global economy.
“It was likely that economic conditions in Europe would weaken further over the period ahead… The sovereign debt problems in the euro area posed the most significant risk to the growth outlook”.
Given the threats to the global economy the Reserve Bank was focused on getting interest rates back to a more normal setting.
“Financial conditions had already been easing somewhat, with a range of lending rates edging down over the past couple of months. Nonetheless, with overall credit growth remaining low, financial conditions on balance appeared to remain somewhat tighter than normal”.
What does it all mean?
Well it was hardly a surprise that there wasn’t anything significantly new in the minutes of the last Reserve Bank Board meeting. Especially considering that since the rate cut and the accompanying statement, we have had the release of the Statement on Monetary Policy and also a speech by Reserve Bank Assistant Governor Lowe. If anything the minutes tend to confirm the view portrayed on November 4, when the Reserve Bank released its latest growth and inflation forecasts.
It is clear that Board members have certainly become more concerned about the global economic outlook, focusing on heightened “risks to the global economy”, watering down its views on inflation and also highlighting an array of headwinds facing the domestic economy.
The European debt crisis dominated discussion and seems to be the key factor in the more flexible stance by policy makers when it comes to interest rates. Inflation is well contained and the Reserve Bank is focussed on a shift to more “normal” financial conditions. At present the variable mortgage rate is still above “normal” and if the risks to growth remain further rate cuts are likely.
Interestingly the Reserve Bank spent time discussing the multi speed nature of the domestic economy. In fact the central banks expected mining investment to increase to around 7 per cent of GDP by 2013/14, while the non-mining sector was expected to grow below trend.
Policymakers did highlight the importance and vagaries of the weather in defining the near term growth story. In fact the recovery in coal exports continued to be slower than the central bank had expected and a growing risk of a wetter-than-usual summer, could further delay the recovery in coal production.
Overall, the Reserve Bank Board minutes paint a mixed picture of the Australian economy. The mining sector continues to dominate the growth outlook with a strong pipeline of investment, however conditions remained weak in the manufacturing, construction, wholesale and retail sectors. In addition Board members noted the softer housing market conditions. With all manner of diverging trends, and downsides risks to the global economy Board members don’t appear to be entirely comfortable at present, and as such further rate cuts are likely.
What are the implications for interest rates and investors?
The lack of momentum in the domestic economy and the heightened risk of further weakness in the global economy certainly adds to the chance of a rate cut in coming months. The Reserve Bank Board seems focussed on shifting to a more neutral setting and given that the variable mortgage rate is still above neutral, a further rate cut is likely. The timing of the rate cut will depend on the volatility in Europe.
