The latest Reserve Bank Board minutes confirms that the decision to leave rates on hold in September was more finely balanced than in prior months, due to the “significant downside risks” to the global economy and the sharp decline in bulk commodity prices.
- The Reserve Bank focus on the global economy – “Information that became available over the past month pointed to slightly softer conditions in many parts of the global economy. Ongoing weakness in the advanced economies appeared to be weighing on exports from Asia.”
- A subdued inflation environment and global uncertainty keeps door open to a further rate cut. “The current assessment of the inflation outlook continued to provide scope to adjust policy in response to any significant deterioration in the outlook for growth.”
- Higher Aussie dollar continues to hurt an array of sectors. “Members discussed the possibility that the high level of the exchange rate was weighing more heavily on the economy than might be expected.”
- Aussie dollar overvalued – The RBA says that models suggest the Aussie dollar is over-valued, “but not substantially so.”
- Imports of goods fell 2 per cent in seasonally adjusted terms in August.
What does it all mean?
The latest Board minutes show that the Reserve Bank continues to maintain an easing bias; however the decision to keep rate on hold earlier this month seems to be more finely balanced than previously thought. In fact there was an array of factors that were debated by Board members, including the sharp decline in some bulk commodity prices, the adverse effects of the higher Aussie dollar on the economy, the slowdown in Chinese activity and a more subdued international outlook.
Of particular focus was the pullback in mining investment largely due to soft commodity prices and high project costs. Interestingly the Reserve Bank highlighted that if the decline in spot prices were sustained it would imply a larger fall in the terms of trade than previously forecast. Couple that view with the fact that inflation is expected to remain within the target band. And in line with Reserve Banks forecasts, it is clear that the likelihood of another rate cut has certainly garnered further interest.
It is important to note that while the likelihood of a further rate cut has increased in a broader sense, the Reserve Bank is still in a holding pattern. The added level of insurance taken out in the last few months ensures the Reserve Bank can afford to sit back for a month or more, get a better gauge of the impact of recent stimulus, and cut rates if there is a “significant deterioration” in the growth outlook.
Interestingly the adverse effects of the higher Aussie dollar were discussed by Board members. At present the higher currency continues to have a significant impact on array of sectors, including manufacturing, retail, tourism and general exports. To a large degree the dollar strength has played a significant part in the multispeed nature of the domestic economy. In fact the patchiness of the recovery will ensure that the Reserve Bank will maintain an easing bias; however a commitment to further rate cuts would more than likely be as a result of global factors.
On the global front, the slowdown in China will be closely watched by officials. And while Board members noted a month earlier that there were signs that Chinese growth was stabilising, at the September meeting the Board noted that recent data had been a touch weaker. At present it is unlikely that momentum will swing sharply, rather the Chinese economy looks set to trend sideways at around current levels till earlier next year. In fact it may be that the regime change provides a catalyst for a pickup in activity early next year. In the near term the softer Chinese economy will continue to add to the level of global uncertainty.
No doubt Europe also remains the watching brief. European growth has continued to deteriorate in recent times and the ongoing sovereign debt concerns emanating from some of the peripheral European economies is a key concern. This is another reason that the Reserve Bank would consider providing a further degree of stimulus to the domestic economy, if deemed necessary.
What is the importance of the economic data?
The Reserve Bank releases minutes of its monthly Board meeting a fortnight after the event. The minutes give a guide to Reserve Bank thinking on interest rate settings.
Data on imports of goods is provided monthly by the Bureau of Statistics. The data assists in gauging strength of domestic demand – spending by both businesses and consumers.
What are the implications for interest rates and investors?
Interest rates are below long-term averages, inflation is at the lower end of the target band, monetary policy is at a stimulatory setting and economic growth is picking up pace, albeit from below trend levels. All these factors allow the Reserve Bank time to get a more accurate picture of the economic landscape.
Looking forward, the Reserve Bank will continue to maintain an easing bias, allowing the Board to once again cut rates if it deems necessary. And given the downside risks to global growth, an October rate cut cannot be ruled out. However we continue to believe that the next cut will be in November after the next round of inflation data.
