17 Feb 2015
RBA minutes: Rate cut required and a lower Aussie
FXStreet (Guatemala) - The minutes of the RBA meeting were released and the Board decided to lower the cash rate by 25 basis points to 2.25 per cent, effective 4 February 2015.
Highlights:
AUD still above most estimates of fundamental value
Lower AUD/USD required for the economy
Decided a February easing allowed additional early communication in the quarterly SoMP
Revival in non-mining investment necessary for above-trend growth, but confidence lacking
Pick up in household consumption also needed, lower fuel prices to help offset soft wages
Members noted that the outlook for global economic growth was little changed.
Members noted that the data released since the December meeting suggested that the domestic economy had continued to grow at a below-trend pace over the second half of 2014.
Activity and prices in the housing market had continued to be bolstered by the low level of lending rates and strong population growth.
Turning to the business sector, members noted that mining investment had continued to decline in the second half of 2014, and larger declines were expected over 2015 as existing projects were completed and very few new projects were likely to proceed. Non-mining business investment had remained subdued and recent data pointed to this continuing into the first half of 2015. Growth in public demand was expected to be subdued over the next year or so.
Members noted that the most recent data on the labour market had been a little more positive than early in 2014. However, while employment growth had strengthened somewhat over the past year, the unemployment rate had increased further over 2014 and average hours worked had remained below the levels of a few years ago.
Consumer price inflation had declined in year-ended terms, partly as a result of a large fall in fuel prices in the December quarter and the effect of the repeal of the carbon price on utility prices in the September quarter.
Overall, the underlying forces driving growth remained much as they had been for some time and GDP growth was still expected to pick up gradually to an above-trend pace in the latter part of the forecast period.
As usual, the path of the exchange rate remained a key area of uncertainty. Members noted that the exchange rate had remained above most estimates of its fundamental value, given the decline in commodity prices over the past year, and that future exchange rate movements would be affected by market expectations for monetary policy, both domestically and abroad. They noted that, all else being equal, a sustained further depreciation would, if it occurred, stimulate growth in the domestic economy and put some temporary upward pressure on inflation.
Commodity prices, particularly those for iron ore and oil, had declined over the past year largely in response to expansions in global supply, though members judged that demand-side factors, such as the weakness in Chinese property markets, had also played some role. Conditions in global financial markets had remained very accommodative.
Domestically, over recent months there had been fewer indications of a near-term strengthening in growth than previous forecasts would have implied.
As a result, the revised staff forecasts – which were based on an unchanged cash rate – suggested that GDP growth would remain below trend over the course of this year, before gradually picking up to an above-trend pace in 2016, somewhat later than had been previously expected.
The unemployment rate was therefore expected to peak a little higher (and later) than in the previous forecast.
The net effect of declining commodity prices and the depreciation of the exchange rate was expected to boost growth over the forecast period. Nonetheless, the higher degree of spare capacity now in prospect and lower oil prices had led to a lowering of the forecast for inflation, offset somewhat by the effects of the recent exchange rate depreciation. The restrained pace of wage increases over the past year or so and accompanying growth in productivity, which had dampened growth in unit labour costs, suggested that low rates of inflation were likely to be sustained. In other respects, the forces underpinning the outlook for domestic activity and inflation were much as they had been for some time.
Members noted the current accommodative setting of monetary policy, which had been providing support to domestic demand. They noted that the Australian dollar had depreciated noticeably against a rising US dollar over recent months, although less so against a basket of currencies, and that it remained above most estimates of its fundamental value, particularly given the significant declines in key commodity prices. Members agreed that a lower exchange rate was likely to be needed to achieve balanced growth in the economy.
On the basis of their assessment of current conditions and taking into account the revised forecasts, the Board judged that a further reduction in the cash rate would be appropriate to provide additional support to demand, while inflation outcomes were expected to remain consistent with the 2 to 3 per cent target. In deciding the timing of such a change, members assessed arguments for acting at this meeting or at the following meeting. On balance, they judged that moving at this meeting, which offered the opportunity of early additional communication in the forthcoming Statement on Monetary Policy, was the preferred course.
Highlights:
AUD still above most estimates of fundamental value
Lower AUD/USD required for the economy
Decided a February easing allowed additional early communication in the quarterly SoMP
Revival in non-mining investment necessary for above-trend growth, but confidence lacking
Pick up in household consumption also needed, lower fuel prices to help offset soft wages
Members noted that the outlook for global economic growth was little changed.
Members noted that the data released since the December meeting suggested that the domestic economy had continued to grow at a below-trend pace over the second half of 2014.
Activity and prices in the housing market had continued to be bolstered by the low level of lending rates and strong population growth.
Turning to the business sector, members noted that mining investment had continued to decline in the second half of 2014, and larger declines were expected over 2015 as existing projects were completed and very few new projects were likely to proceed. Non-mining business investment had remained subdued and recent data pointed to this continuing into the first half of 2015. Growth in public demand was expected to be subdued over the next year or so.
Members noted that the most recent data on the labour market had been a little more positive than early in 2014. However, while employment growth had strengthened somewhat over the past year, the unemployment rate had increased further over 2014 and average hours worked had remained below the levels of a few years ago.
Consumer price inflation had declined in year-ended terms, partly as a result of a large fall in fuel prices in the December quarter and the effect of the repeal of the carbon price on utility prices in the September quarter.
Overall, the underlying forces driving growth remained much as they had been for some time and GDP growth was still expected to pick up gradually to an above-trend pace in the latter part of the forecast period.
As usual, the path of the exchange rate remained a key area of uncertainty. Members noted that the exchange rate had remained above most estimates of its fundamental value, given the decline in commodity prices over the past year, and that future exchange rate movements would be affected by market expectations for monetary policy, both domestically and abroad. They noted that, all else being equal, a sustained further depreciation would, if it occurred, stimulate growth in the domestic economy and put some temporary upward pressure on inflation.
Commodity prices, particularly those for iron ore and oil, had declined over the past year largely in response to expansions in global supply, though members judged that demand-side factors, such as the weakness in Chinese property markets, had also played some role. Conditions in global financial markets had remained very accommodative.
Domestically, over recent months there had been fewer indications of a near-term strengthening in growth than previous forecasts would have implied.
As a result, the revised staff forecasts – which were based on an unchanged cash rate – suggested that GDP growth would remain below trend over the course of this year, before gradually picking up to an above-trend pace in 2016, somewhat later than had been previously expected.
The unemployment rate was therefore expected to peak a little higher (and later) than in the previous forecast.
The net effect of declining commodity prices and the depreciation of the exchange rate was expected to boost growth over the forecast period. Nonetheless, the higher degree of spare capacity now in prospect and lower oil prices had led to a lowering of the forecast for inflation, offset somewhat by the effects of the recent exchange rate depreciation. The restrained pace of wage increases over the past year or so and accompanying growth in productivity, which had dampened growth in unit labour costs, suggested that low rates of inflation were likely to be sustained. In other respects, the forces underpinning the outlook for domestic activity and inflation were much as they had been for some time.
Members noted the current accommodative setting of monetary policy, which had been providing support to domestic demand. They noted that the Australian dollar had depreciated noticeably against a rising US dollar over recent months, although less so against a basket of currencies, and that it remained above most estimates of its fundamental value, particularly given the significant declines in key commodity prices. Members agreed that a lower exchange rate was likely to be needed to achieve balanced growth in the economy.
On the basis of their assessment of current conditions and taking into account the revised forecasts, the Board judged that a further reduction in the cash rate would be appropriate to provide additional support to demand, while inflation outcomes were expected to remain consistent with the 2 to 3 per cent target. In deciding the timing of such a change, members assessed arguments for acting at this meeting or at the following meeting. On balance, they judged that moving at this meeting, which offered the opportunity of early additional communication in the forthcoming Statement on Monetary Policy, was the preferred course.