The Reserve Bank has released minutes of the Board meeting held on August 7.
Overall it is clear that the Reserve Bank is currently happy with interest rate settings. Inflation remains consistent with the 2-3 per cent target, economic growth is close to trend and financial conditions had eased following recent rate cuts. In short, the Reserve Bank won’t be cutting rates any time soon unless the global economy worsens.
What does it all mean?
- Overall, it is clear that the Reserve Bank is sitting comfortably on the interest rate sidelines. Policymakers seem more comfortable with domestic economic conditions but continue to watch the global situation carefully. Europe, the US and Asia have slowed but the situation in China has appeared to stabilise.
- There is nothing new for investors. If interest rates were to change, it would be down. CommSec continues to factor in the risk of a rate cut in November, but it is still more a risk than anything else. The Reserve Bank seems happy with monetary settings.
- The key factors that could prompt a rate cut are a new crisis in Europe, deterioration of the US or Chinese economies, or a sharply higher Aussie dollar.
- The Reserve Bank is comforted by the “noticeable” lift in business borrowing and pickup in consumer spending. Still it notes temporary factors had boosted spending and the Bank is still monitoring the exchange rate which remains high despite the weakening of the global economy.
- There was further acknowledgement of the “patchwork” economy: “activity continued to vary significantly across industries”. The resource sector was OK but the high Aussie dollar hurt other industries while there were “weak conditions in the housing market.”
- There were particularly positive comments on resource projects: “Members were informed that additional large resource projects had commenced or received approval in recent months, thereby sustaining the very large stock of work in the pipeline.”
- The Reserve Bank noted the temporary boost to spending from government payments over May and June and noted “tentative” signs of improvement in housing.
- Reserve Bank concern about Aussie dollar strength is still subtle. The RBA Board noted the stronger Aussie dollar, boosted by foreign purchases, with the trade weighted index back near highs, “notwithstanding the decline in the terms of trade and the weaker global outlook.”