- Minutes of the June Reserve Bank Board meeting suggest Board members were very comfortable to keep interest rates on hold. But believed that they could do more if necessary.
- Reserve Bank Board members discussed the response by the household sector to low interest rates “There were also signs that the appetite for borrowing in the household sector was picking up, and the housing market generally appeared to be improving, as the effects of the most recent and earlier reductions in the cash rate worked their way through the economy”.
- The RBA seems to be comfortable with a lower Aussie dollar. “The exchange rate had also depreciated noticeably, though it remained at a high level considering the decline in export prices … It was possible that the exchange rate would depreciate further over.
What does it all mean?
- The Reserve Bank board minutes have highlighted that policymakers certainly have the scope to cut rates further, if they deem it is necessary. The key focus was the move lower in the Aussie dollar since the last rate cut. Board members were comfortable with the lower Aussie but the minutes suggested that a further fall in the currency would be preferable, providing much needed relief to export orientated sectors.
- Interestingly, the minutes fleshed out the Reserve Banks thinking when it comes to the inflationary impact from a lower currency – believing that slower wage growth would offset imported inflation. In fact RBA forecasts suggest inflation is likely to remain well within the 2-3 per cent target range over the next year.
- While the Reserve Bank has made it clear that it has the scope to cut interest rates again, it is unlikely that multiple rate cuts are on the cards. Board members discussed a number of positives. The low interest rate environment had driven strong wealth gains through higher equity and dwelling prices. In addition the “appetite for borrowing in the household sector was picking up” as the prior rate cuts filter through the economy.
- The one area of ongoing concern for policymakers is the lack of activity from the non-mining business sector. Although consumer confidence had improved and retail sales had ticked higher, it was yet to translate through to a significant improvement in business confidence or conditions. Anecdotally the non-mining business sector is unwilling to commit to future investment citing the Federal election and budget uncertainty. In addition profitability continues to be squeezed.
- It’s clear that if interest rates were to change, it would be down. CommSec continues to pencil in the possibility of just one further rate cut but not until August. Interest rate sensitive parts of the economy have shown signs of responding to the rate cuts, and the Reserve Bank is likely to want a couple of months to judge the impact of latest rate cut. Also the recent substantial fall in the Australian dollar, Economic Insights June 18 2013 2 Economic Insights: RBA: Open to further rate cuts is likely to keep them on the interest rate sidelines over the next month. The slide in the Australian dollar provides an additional degree of stimulus to the economy, boosting exports across manufacturing to agriculture while also supporting inbound tourism – effectively acting like a quasi-rate cut.
What do the figures show?
Minutes from the June 2013 Reserve Bank Board meeting Global outlook
- “Data on global economic activity released over the past month had been broadly consistent with earlier forecasts of around average growth in Australia’s major trading partners this year, with growth picking up gradually thereafter.”
- Inflation / wages: “Forward-looking indicators of labour demand were consistent with further moderate growth in employment. Wages growth had slowed over recent quarters, which would help to contain inflation as the exchange rate depreciated”
- Domestic conditions: “For the domestic economy, the best estimate was that growth had been a bit below trend over the past four quarters. Most recent data were consistent with earlier forecasts of this continuing in the near term”.
- Business sector: “Conditions in the non-mining business sector remained subdued. Survey measures of conditions and investment intentions, together with only modest growth in business debt, suggested that non-mining business investment would remain subdued in the near term. Nonetheless, the latest ABS survey of firms’ investment intentions for 2013/14 indicated that modest growth in non-mining business investment was likely over the course of the year ahead.”
- Household sector: “There were also signs that the appetite for borrowing in the household sector was picking up, and the housing market generally appeared to be improving, as the effects of the most recent and earlier reductions in the cash rate worked their way through the economy”.
- Outlook for rates: “Interest rates had declined further as a result of the Board’s decision at the May meeting. The exchange rate had also depreciated noticeably, though it remained at a high level considering the decline in export prices that had taken place over the past year and a half. It was possible that the exchange rate would depreciate further over time as the terms of trade declined, which would help to foster a rebalancing of growth in the economy”.
- “At this meeting, members viewed the current stance of monetary policy as appropriate for the time being. The Board also judged that the inflation outlook as currently assessed might provide some scope for further easing, should that be required to support demand.”
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.
What are the implications for interest rates and investors?
Interest rates are now well below long-term averages, inflation is at the low end of the target band, monetary policy is at a stimulatory setting and economic growth was mildly below trend. All these factors allow the Reserve Bank time to get a more accurate picture of the economic landscape.
The question is whether the non-mining sector can pick up the slack left by the pullback in mining investment. Historically in an election year, households and businesses tend to retreat and as such another rate cut cannot be ruled out but it is unlikely to take place in the near term. CommSec is pencilling another rate cut in August.