RBA Finds It Hard To Judge The Effect Of Decline In Mining Investment And Budget Tightening

The RBA minutes for the July meeting contained little new information. However, it revealed that policymakers remained uncertain about the economic outlook. While monetary easing has been working to boost demand, it is hard to gauge the impacts of the decline in mining investment and planned fiscal consolidation on the economy. Despite improvement in the employment condition, the forward-looking indicators have been mixed. The RBA reiterated that Australian dollar has been strong and warned of the negative impacts on the economy.

The economic outlook has more or less the same as in previous months. As mentioned in the minutes, “global economic conditions were little changed over the past month and were consistent with growth in Australia’s major trading partners remaining close to the average of the past decade. Commodity prices had also been steady, but were well below levels seen earlier this year, the more so in Australian dollar terms given the appreciation of the exchange rate since then. Financial conditions globally remained very accommodative”. Domestically, policymakers noted that the forward looking indicators were “mixed” while the “conditions in the labor market had improved a little since earlier in the year”. They believed these indicated that the growth in the job market was “only moderate”. Given the comments, we look forward to some changes in the RBA’s employment outlook in the August meeting.

On exchange rate, policymakers judged that the Aussie “remained high by historical standards, particularly given the declines in key commodity prices, and was therefore offering less assistance than it otherwise might in achieving balanced growth in the economy”. Policymakers also noted that it’s surprising that that the USD has remained low while the euro has stayed “resilience”. As mentioned in the minutes, “conditions in foreign exchange markets had remained very subdued, with little change in the major exchange rates and volatility declining further to multi-decade lows in the past month. The Australian dollar had appreciated by around 2% over the past month on a trade-weighted basis, which took its appreciation since late January to 8% notwithstanding noticeable declines in bulk commodity prices over the same period. Members noted that other currencies such as the Canadian and New Zealand dollars had experienced similar movements”. and that the most surprising development was the continued low level of the US dollar, as well as the resilience of the euro”.

On monetary policy, the RBA indicated that it’s appropriate to leave the cash rate unchanged at 2.5% as “low interest rates were working to support demand”. However, the central bank noted that “it was difficult to judge the extent to which this would offset the anticipated substantial decline in mining investment and the effect of planned fiscal consolidation”. The policy rate has remained the same since August 2013.

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