RBA: Cautious optimism but in wait and see mode

RBA Board minutes

• Reserve Bank Board minutes: Minutes of the November Board meeting confirm that the Reserve Bank is assessing developments before deciding the next move in interest rates. “it was prudent to hold the cash rate steady while continuing to gauge the effects, but not to close off the possibility of reducing it further should that be appropriate to support sustainable growth in economic activity, consistent with the inflation target.”
• Rate cuts at work: “There was mounting evidence that monetary policy was supporting activity in interest-sensitive sectors and asset values, and given the lags with which monetary policy operates, the stimulatory effects would likely continue coming through for some time.”
• Board members discuss uncomfortably high Aussie dollar: “The Australian dollar, while below its level earlier in the year, remained uncomfortably high. Members noted that a lower level of the exchange rate would likely be needed to achieve balanced growth in the economy”.

What does it all mean?

• The RBA Board minutes was meant to be a rather boring affair, particularly given that since the decision to leave interest rates on hold in early November, we have had the release of the Statement on Monetary policy as well as the a couple of key speeches – including one by the Reserve Bank Governor Stevens. However the minutes provided policymakers with a further opportunity to flesh out their views on future interest rates movements.
• The minutes stressed that the Board members had discussed not to close the door on further rate cuts, but also explicitly state that further rate cuts are not a certainty. In other words, policymakers are hoping that the super stimulus being provided by low rates will be enough, but if not well they will consider a further interest rate cut Essentially the Reserve Bank is in “wait and see” mode, and will look to get a clearer picture of how the domestic business and household sectors respond in the Christmas spending period and in the early part of 2014.
• The Statement on Monetary policy, released a fortnight ago, fleshed out the Reserve Banks views on the economic landscape. There confirmed modest downgrades to near medium term economic growth forecasts, while inflation is expected to remain in the 2-3 per cent target band.
• Interestingly two key concerns continued to dominate central bank thinking. The rebalancing of the domestic economy (away from mining investment) and the uncomfortably high Australian dollar. Policymakers seem more comfortable on the transition to the new Australian growth driver, the housing sector. However discussions around the currency suggested that a low currency would be need to rebalance the economy.
• Overall the minutes certainly suggest an air of cautious optimism. While below-trend growth and rising unemployment were likely to be near term drags on the economy. The super stimulatory monetary policy setting is supporting a pickup in activity across interest rate sensitive sectors. If there is an ongoing lift in activity and unemployment does not rise at an uncomfortable pace, the Reserve Bank will be comfortable remaining on the interest rate sidelines.
• It is important to note that the Reserve Bank has provided the economy with substantial stimulus in the last year. And while the RBA maintains a cautious approach, the prior rate cuts are only just starting to have an impact across the economy. CommSec expects no change in policy settings in the next few months.

What do the minutes and data reveal?

RBA Board minutes

• The full-text of the minutes can be found at: http://www.rba.gov.au/monetary-policy/rba-board-minutes/2013/05112013.html
• The key paragraph of the minutes was: “The Board’s judgement was that, given the substantial degree of policy stimulus that had been imparted, it was prudent to hold the cash rate steady while continuing to gauge the effects, but not to close off the possibility of reducing it further should that be appropriate to support sustainable growth in economic activity, consistent with the inflation target. The Board would continue to examine the data over the months ahead to assess whether monetary policy remained appropriate.”
• The Reserve Bank believes that substantial rate cuts was providing positive momentum to the economy: “There was mounting evidence that monetary policy was supporting activity in interest-sensitive sectors and asset values, and given the lags with which monetary policy operates, the stimulatory effects would likely continue coming through for some time.”
• The Reserve Bank said continued to discuss the need for a low Australian dollar: “Australian dollar, while below its level earlier in the year, remained uncomfortably high. Members noted that a lower level of the exchange rate would likely be needed to achieve balanced growth in the economy.”
• 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.
• The Reserve Bank has retired to the sidelines. We believe that it will be reluctant to cut rates again unless global or domestic factors unexpectedly weaken. The election is out of the road; there are signs that confidence levels are lifting; the housing market is strengthening; and the Chinese economy is improving. The Reserve Bank would be hopeful that the economy strengthens in coming months, underpinned by super-low interest rates and momentum provided by home construction and sales.
• The main game for the Reserve Bank is the changing of the baton of economic growth drivers from mining to other sectors of the economy. In particular the RBA will be closely assessing borrowing behaviour, especially the desire to take on more risk.

What is the importance of the report?

• 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?

• The Reserve Bank has retired to the sidelines. We believe that it will be reluctant to cut rates again unless global or domestic factors unexpectedly weaken. The election is out of the road; there are signs that confidence levels are lifting; the housing market is strengthening; and the Chinese economy is improving. The Reserve Bank would be hopeful that the economy strengthens in coming months, underpinned by super-low interest rates and momentum provided by home construction and sales.
• The main game for the Reserve Bank is the changing of the baton of economic growth drivers from mining to other sectors of the economy. In particular the RBA will be closely assessing borrowing behaviour, especially the desire to take on more risk.