RBA Minutes: Further rate cuts likely needed in coming year
The Reserve Bank of Australia (RBA) published the Minutes of its August monetary policy meeting on Tuesday, which showed that board members agreed that some further reduction in the cash rate is likely to be needed in the coming year.
Additional takeaways
The RBA board saw a strong case for a 25bps cut in the cash rate.
The board judged some further reduction in the cash rate likely needed over the coming year.
The stance of policy was still considered somewhat restrictive.
The pace of rate cuts would be determined by incoming data and the balance of global risks.
The board saw arguments for both a gradual pace of easing and for a faster pace.
The labour market remained a little tight, inflation was still above midpoint, and domestic demand was recovering.
Uncertainty about spare capacity and the neutral rate also argued for gradual easing.
Faster easing might be needed if the labour market is already in balance, risking inflation undershooting the midpoint.
The balance of risks could shift to the downside on adverse developments in the global economy.
The board agreed it was not yet possible to judge between scenarios and would be guided by data.
Latest staff forecasts were consistent with meeting full employment and inflation targets.
The board judged house price increases to be within the bounds of past easing cycles, with home building picking up.
Risks from U.S. tariff policy remained significant, though the worst outcomes seemed to have been avoided.
The board considered whether to run down government bond holdings at a faster pace but decided it was not needed.
Bonds would continue to be run down as they mature, with a faster pace no longer under consideration.
Market reaction
At the time of press, the AUD/USD pair was up 0.07% on the day at 0.6477.
RBA FAQs
The Reserve Bank of Australia (RBA) sets interest rates and manages monetary policy for Australia. Decisions are made by a board of governors at 11 meetings a year and ad hoc emergency meetings as required. The RBA’s primary mandate is to maintain price stability, which means an inflation rate of 2-3%, but also “..to contribute to the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people.” Its main tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will strengthen the Australian Dollar (AUD) and vice versa. Other RBA tools include quantitative easing and tightening.
While inflation had always traditionally been thought of as a negative factor for currencies since it lowers the value of money in general, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Moderately higher inflation now tends to lead central banks to put up their interest rates, which in turn has the effect of attracting more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in the case of Australia is the Aussie Dollar.
Macroeconomic data gauges the health of an economy and can have an impact on the value of its currency. Investors prefer to invest their capital in economies that are safe and growing rather than precarious and shrinking. Greater capital inflows increase the aggregate demand and value of the domestic currency. Classic indicators, such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can influence AUD. A strong economy may encourage the Reserve Bank of Australia to put up interest rates, also supporting AUD.
Quantitative Easing (QE) is a tool used in extreme situations when lowering interest rates is not enough to restore the flow of credit in the economy. QE is the process by which the Reserve Bank of Australia (RBA) prints Australian Dollars (AUD) for the purpose of buying assets – usually government or corporate bonds – from financial institutions, thereby providing them with much-needed liquidity. QE usually results in a weaker AUD.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the Reserve Bank of Australia (RBA) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the RBA stops buying more assets, and stops reinvesting the principal maturing on the bonds it already holds. It would be positive (or bullish) for the Australian Dollar.
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