Interest rate relief hitched to Aussie dollar, says RBA

The Reserve Bank of Australia does not know whether it will have to cut interest rates further.

But what it eventually does do will depend heavily on the Australian dollar and trends in business investment outside the resources sector.

For now, the RBA’s content to hold the cash rate at its historic low of 2.5 per cent.

But, as it’s done every month starting in August, it’s been quite explicit that the option to cut again remains open, if it’s needed.

The message came through loud and clear in the quarterly monetary policy statement, released earlier this month and three days after its board meeting.

But it was repeated in the minutes of that meeting on Tuesday.

“The Board’s judgment 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 its 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 RBA said in the minutes.

The problem for the RBA, and for anyone else trying to guess which way it will jump next, is that the outlook is so uncertain.

The RBA hopes, even expects, the economy will achieve a “rebalancing”, with other sectors picking up as the mining investment boom fades.

And there are encouraging signs that low interest rates are starting to stimulate activity and boost asset prices, all part of the mix in an economic pickup.

But, as the RBA said in the minutes, the economy faces three key constraints: “the decline in mining investment, the high level of the exchange rate and weak public demand”.

Whether or not the economy can find sources of growth to overcome those negatives and manage its rebalancing act hinges on some key unknowns.

One is the timing and strength of the hoped-for pickup in business investment outside the mining sector, which the RBA says is “very difficult to predict”.

Another is the high exchange rate, which RBA governor Glenn Stevens late last month said was inconsistent with the economy’s costs and productivity.

“Members noted that a lower level of the exchange rate would likely be needed to achieve balanced growth in the economy,” the RBA said in the minutes.

The implication of the minutes is that the outlook for interest rates depends crucially on the Australian dollar and indicators of non-mining business investment.

Ongoing strength in the exchange rate and continued weakness in investment would likely push the RBA further toward using that option to cut the cash rate again.

Here’s how Twitter responded to the statement.

Stay informed, daily
A FREE subscription to The New Daily arrives every morning and evening.
The New Daily is a trusted source of national news and information and is provided free for all Australians. Read our editorial charter.
Copyright © 2024 The New Daily.
All rights reserved.