The RBA minutes for the August meeting confirmed the central bank’s guidance that interest rates would stay low for a considerable period of time. The minutes also unveiled that policymakers continued to see significant uncertainties in the economic outlook, as well as a ‘notable degree spare capacity in the labor market’. While the Statement on Monetary Policy showed downward revisions of staff’s forecast on growth, the members did not see the outlook was ‘materially different’ and considered ‘the implications for the forecasts of the usual assumptions that the cash rate and the exchange rate remained at their current levels and noted that the no-change assumption for the cash rate was consistent with market expectations over the near term’.
On domestic economic developments, the RBA noted that inflation in 2Q14 was ‘a little higher than expected’ but judged that it was due to temporary factors. The slump in retail sales in the second quarter was partly driven by ‘unusually warm weather at the start of winter’, whilst confidence had rebounded to above-average levels. On the housing market, the central bank noted that residential building approvals had declined but it appeared to have downplayed the fall by noting they were still at a high level, with a ‘substantial amount of work yet to be done’ and ‘robust’ house price inflation. Policymakers acknowledged that businesses are reluctant to invest unless they were confident of strong demand.
In response to the downwardly revised forecasts the SMP, the minutes assured that the staff forecasts were ‘not materially different from those presented 3 months earlier. Growth was expected to be below average over 2014/15 before increasing to an above-average pace by 2016. Growth in non-mining activity had been expected to increase a little further, having already picked up over the past year, partly as a result of the support provided by the very low level of interest rates. Resource exports were forecast to add substantially to growth over the next few years. However, mining investment was expected to decline more rapidly than it had to date, and ongoing fiscal consolidation and the effects of the still high level of the exchange rate were expected to restrain growth’. Yet, it appeared policymakers did spend some time discussing the ‘significant’ risks around the outlook given the ‘importance of considering the risks …as well as the central projection’.
The central bank left the cash rate unchanged at 2.5%, maintaining the forward guidance that ‘monetary policy was appropriately configured and that, on present indications, the most prudent course was likely to be a period of stability in interest rates’. However, it was noted in the minutes that ‘average lending rates on housing and business loans in Australia continued to edge down over July’ and ‘cumulative movements in interest rates since the start of the year amounted to a noticeable easing in financial conditions’. We believed a key reason for the RBA to refrain from further easing is that lending rates are edging lower.