The RBA board minutes shouldn’t really tell us anything we don’t already know given we have had the governor’s statement and a quarterly Statement on Monetary Policy (SoMP) to guide markets.
But it’s clear in the minutes, which bridge the brevity of the governor’s statement and the vastness of the SoMP, that the RBA really is gearing up for a lift in the domestic economy and the continuation of Australia’s economic transition.
The RBA highlights that Asia has slowed more than they expected and that subdued inflation leaves scope for another rate cut if necessary. But then they go on to make the point on why that cut is unlikely to be necessary.
The minutes show the RBA continues to believe that the combination of a lower Australian dollar and record low interest rates (even with the recent uptick in mortgage rates) continue to drive domestic growth.
“Members noted that recent data on economic activity in Australia suggested that the moderate economic expansion had continued. The very low level of interest rates was supporting growth in household consumption and dwelling investment,” the minutes report.
“Household consumption was forecast to contribute significantly to expenditure growth over the next couple of years, supported by low interest rates and relatively strong employment growth.”
That’s even though wages growth is still reasonably low, the RBA said.
On the exchange rate the minutes were almost exultant, for central bankers at least, about the fall in the Australian dollar.
The RBA noted that while the dollar was adjusting to the fall in commodity prices it was also driving increased demand for domestic production especially in the services sector, which had experienced strong employment growth over the past year.
Against the backdrop of Aussie dollar-induced growth and a pickup in household consumption the RBA highlighted how near we are to the end of the dampening effects on GDP from the mining slowdown.
Mining investment was expected to continue to decline over the forecast period, with the decline expected largely to have run its course by the end of 2017.
That’s good news if the rest of the economy is benefiting from a weaker Aussie dollar and a lift in the domestic sector.
Indeed the RBA reiterated that “the forecast for the Australian economy remained for growth to strengthen gradually over the next two years as the drag on GDP growth from falling mining investment waned and activity progressively shifted to non-mining sectors of the economy.”
That’s not without risks the minutes show.
But the outlook seems to have brightened and the RBA is confident enough that there will be no re-ignition of the housing boom again now that it and APRA’s attention has been focused on lending.
So, there being no inflationary issues, no barrier exists to another cut should the economy need it.
That’s a win-win for the economy and the RBA.