RBA Minutes: Board agreed further rate cuts warranted over time
The Reserve Bank of Australia (RBA) published the Minutes of its July monetary policy meeting on Tuesday, highlighting that the board agreed further rate cuts warranted over time and focus was on timing and extent of easing.
Additional takeaways
Board considered whether to leave rates at 3.85% or to cut by 25bps.
Majority agreed prudent to await confirmation on inflation slowdown before easing,
Majority felt cutting rates three times in four meetings would not be "Cautious and gradual.”
Case for no change cited some data, including on inflation, had been little firmer than expected.
Job market had also not loosened as expected, less risk of severe global downturn.
Members agreed monetary policy was modestly restrictive, though financial conditions had eased.
Difficult to know how far rates can fall before policy no longer restrictive, so prudence needed.
Minority for rate cut put more weight on downside risks to economic outlook, inflation.
Case for cut cited evidence inflation was on track to mid-point of target band, if not lower.
US Tariffs would be drag on world growth and thus Australia, where GDP already subdued.
Unsure whether market sector employment would pick up as non-market sector slowed.
Outlook for global economy highly uncertain, US trade policy unpredictable.
Market reaction to the RBA Meeting Minutes
At the time of writing, AUD/USD is trading 0.08% lower on the day to trade at 0.6519.
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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